EXCHANGE RATE

S.KAMAL HAYDER KAZMI,
Research Analyst
, PAGE
Aug
 03 - 09, 2009

In the era of globalization and financial sector deregulation, exchange rate plays an important role in international trade and finance for a small open economy like Pakistan. This is because movements in exchange rates affect the profitability of multinationals and increase exchange exposure to enterprises and financial institutions.

EXCHANGE RATE TREND IN PAK
YEAR HIGH LOW CLOSE AVERAGE VOLTY C/C % CHANGE
FY05 61.6 57.55 59.64 59.35 2.57 -3.21
FY06 60.45 59.57 60.22 59.87 0.92 -0.97
FY07 61.01 60.18 60.37 60.65 0.96 -0.26
FY08 69.75 60.3 68.4 62.73 0.04 -13.30
Source: SBP

A stable exchange rate may help enterprise and financial institutions in evaluating the performance of investments, financing, and hedging and thus reducing operational risks. In Pakistan, fluctuations in the exchange rate may have a significant impact on the macroeconomic fundamentals such as interest rates, prices, wages, unemployment, and the level of output. This may ultimately results in a macroeconomic disequilibrium that would lead to real exchange rate devaluation to correct for external imbalances.

FOREIGN EXCHANGE MARKET

Deteriorating external account position combined with political uncertainties increased pressure on the exchange rate considerably during FY08. Compared with FY07, exchange rate showed higher volatility with a more pronounced reflection of the prevailing demand and supply conditions. The volumes traded in the market also increased in line with the growth in country's trade volume.

Although SBP continued to allow the market forces to play their due role in determining the exchange rates, managing it was a challenge as the investor sentiments and speculative tendencies introduced spikes in exchange rate during the year.

During the 1Q08, exchange rate remained stable with a gradual weakening of the rupee. SBP was able to comfortably buy back most of the POL support provided to the banks. During Nov-Jun period, the exchange rate showed depreciation of 12.7%, increasing the overall depreciation during FY08 to about 13.3%. The exchange rate again started rising and gradually reverted to the high of Rs. 62.75 per US$ by March 08. During April 08 weakening trend in rupee value continued and exchange rate gradually moved up to Rs. 64.60 per US$ by the month end. From a regional perspective, PKR was among the few currencies, which showed depreciation against US Dollar during FY08. Besides Pak Rupee, Indian Rupee and Thai Baht also depreciated against the US currency.

OIL PRICES AND ITS AFFECTS

During FY08, SBP continued its support for POL payments. However, this year SBP diverted about 25% of the total POL payments to the market sources. As a result, SBP provided a total of $8,951.2 mn to banks against POL payments during FY08 compared with $7,473 mn in the preceding year. At the same time banks arranged about $2,080 mn from their own sources to fund the oil payments during FY08. Despite this the total quantum of POL support provided by SBP increased by 20% from the previous year.

EXCHANGE RATES IN 2009 (SELLING)

CURRENCY 2-JAN 6-FEB 6-MAR 3-APR 8-MAY 5-JUN 3-JUL 31-JUL
Dollar 78.49 78.69 80.3 80.45 80.4 80.6 81.4 83.2
Pound 113.23 114.93 113.86 118.32 121.62 129.97 133.35 137.4
Euro 110.44 100.56 101.03 108.1 106.9 114.47 113.91 117.52
Canadian $ 64.41 63.66 62.47 64.86 69.04 73.4 70.18 76.76
Jap Yen 0.8689 0.8659 0.8181 0.8073 0.8156 0.8323 0.8483 0.8731
HK $ 10.13 10.15 10.35 10.38 10.37 10.4 10.5 10.74
Singapore $ 54.55 52.22 51.79 53.44 54.69 55.71 56.09 57.75
Malaysian Ringgit 22.66 21.81 21.59 22.43 22.86 23.05 23.11 23.62
UAE Dirham 21.37 21.42 21.86 21.9 21.89 21.95 22.16 22.65
Saudi Riyal 20.91 20.98 21.41 21.45 21.44 21.49 21.7 22.19
Kuwaiti Dinar 284.14 266.85 271.74 276.43 276.17 280.39 283.38 289.33

In the last quarter of the year, the oil support volume increased significantly when SBP provided $3,153 mn of oil support compared with $1,950 mn during the corresponding period in the previous year. This was mainly because of the unprecedented rise in international oil prices which increased by over 100% during the year. The higher oil bill had its implications on the country's foreign exchange reserves, which after reaching a historic high level of $16.5 bn, started showing a declining trend. The reduced inflow volumes in the interbank market also hampered SBP's ability to buyback the POL support provided earlier, exacerbating the pressure on the country's FX reserves.

EXCHANGE COMPANIES

In FY08 SBP initiated reform process in the Exchange Companies sector with a view to bring better market discipline through enhanced transparency, disclosure, strong monitoring, supervision, and enforcement. The most important has been a change in SBP's approach from bringing financial discipline and corporate culture to ensuring discipline, strict compliance, and proper corporate governance.

CONCLUSION

In Pakistan, exchange rates reflect the balance of supply and demand for currencies. Two key factors affecting supply and demand are interest rates and the overall strength of the economy. Economic indicators such as GDP, foreign investment and the trade balance reflect the general health of our economy and are therefore responsible for the underlying shifts in supply and demand for that currency.