KARACHI: The Pakistani rupee fell for a third straight session on Tuesday after the central bank withdrew its support on Friday, effectively devaluing the local currency.
Breaking the all previous records, the greenback on Tuesday touched Rs 111.50 in the interbank market, which is almost 5 per cent higher from Rs 105.40 restricted by the finance ministry for last four years. Later it closed at Rs 110.46.
“It was a reaction of the meeting of International Monetary Fund (IMF) representatives and government of Pakistan, as the IMF was persistently pressurising the federal government to depreciate the local currency against the dollar by 8-10 per cent,” the market pundit said on anonymity.
It was at 110.25 per dollar at 11 am after opening at 108.41, traders said. It had opened at 105.55 per dollar on Friday.
The rupee, which has mostly traded in a tight range of 104-105 per dollar since December 2015, has shed over 5 per cent in the past three sessions.
The State Bank of Pakistan’s (SBP) withdrawal of support for the rupee was widely seen as a devaluation measure since the central bank is the most influential player in the thinly traded local foreign exchange market and controls what is widely considered a managed float system.
“Presently the central bank is allowing the market to determine the rate, but it seems to be reversing the extreme volatility if any during intraday trading,” EFG Hermes Pakistan chief executive officer Muzzammil Aslam, said. He added earlier that an increase in the dollar rate leads to a rise in prices of food items, petrol and services.
The rate of the US dollar broke its last highest record as of 2014 as it reached Rs 111 in the interbank market.
The central bank, in September 2016, relaxed the dollar in the interbank market, however, finance minister Ishaq Dar froze rates at Rs 105.40 after depreciating Rs 1.30 per dollar.
The official of the treasury department claimed, “The central bank has given free hand to the banks to monitor its free market rates and where it (dollar) could go. Till end the of the market day, the dollar closed at Rs 110.46 for buying in the interbank market, which is around 5 per cent up compared to the previous rates of Rs 105.50.
“Pakistan’s economy is well positioned to achieve the real GDP growth target of 6 per cent in 2017-18,” the SBP said in its previous press release, which means, SBP is satisfied with the current exchange rates, the official claimed.
The central bank was perturbed with the declining reserves which had come down to below $ 19 billion in last one year from its peak of $ 24.5 billion.
SBP was of the view that this market-driven adjustment in the exchange rate will contain the imbalance in the external account and sustain higher growth trajectory. The exchange rate will continue to reflect the demand and supply conditions, and SBP stands ready to intervene in case speculative and/or momentary pressures emerge, for the smooth functioning of the foreign exchange markets, the SBP said.
Topline Securities Head Mohammad Sohail said that the reason behind the increase is the country’s high import bill, adding that the former finance minister had unnaturally restricted the rate at Rs 105.50.
Pakistan recently raised $ 1 billion in a five-year Sukuk and $ 1.5 billion in ten-year Eurobond transactions, which the SBP claimed it had received last week.
Normally when supply increases, like it did last week, the market stabilises as the balance of payments increases, but the market reacted differently and nobody is ready to control it.
Forex Association President Malik Bostan said that the SBP should have some control on the interbank market since the demand for dollar is high and it may further depreciate the local currency which could be harmful for the country’s economy.
The central bank said after market hours on Friday that a weaker rupee would help the economy grow and ease balance of payments pressures, comments that market participants interpreted as SBP’s approval of a weaker rupee.
“I see the rupee settling somewhere from 110 to 111, I think it would not be allowed to pass 112,” said Samiullah Tariq, director of research at brokerage firm Arif Habib.