Karachi: The rupee has weakened by 10.24 percent against the dollar in the inter-bank market to range between Rs137 to 139, according to media reports.
The rupee which closed trading at Rs124.27 on Monday shot up to Rs134 on Tuesday in the inter-bank market before touching a record high of Rs139 before falling to Rs133 against the greenback.
This indicates the State Bank of Pakistan (SBP) has decided to let the local currency depreciate in line with IMF recommendations which wanted to see the rupee at Rs145 against the dollar.
In a statement to Reuters, Abid Qamar, the SBP spokesman said, “The market is aware about the overall macro-economic conditions and based on those conditions, they are having their own expectations about the exchange rate, so that is driving (the rupee valuations) currently.”
This is the fifth devaluation of the rupee since December 2017, which has seen the local currency losing a cumulative 26 percent of its value against the greenback.
According to an analyst, the inter-bank market rates for the rupee to a dollar were ranging between Rs137 to Rs139 and the kerb market was quoting its own rates.
This 10 percent depreciation would translate to a weakening of around Rs15 to a dollar from the inter-bank market closing rate of Rs124.27 on Monday.
The rupee was trading at Rs138 against the dollar in the kerb market, according to media reports.
The government on Monday decided to officially approach the International Monetary Fund for a bailout as the KSE-100 index had plummeted 1328.09 points, continuing a losing spree of six consecutive sessions.
The devaluation had been imminent since the rupee had been diminishing in value against the greenback since the start of October.
According to Adnan Sheikh, Pak Kuwait Investment Co AVP Research so far Pakistan’s imports have been resilient to previous rounds of devaluation, but he felt we are fast approaching the threshold where consumption of unnecessary items will begin to slow.
He added, “Petrol prices must be revised upwards as well to Rs150 per litre since average global gas prices stand around $1.2 per litre whilst in Pakistan, they are $0.8 per litre compared to India where it is $1.15 per litre.”
Mr Adnan said SBP data shows the real effective exchange rate (REER) is overvalued by around 11 percent.
He told to be competitive its usually deemed wise to keep it undervalued by 5-10 percent, which meant a 15-20 percent devaluation from the Rs124 level.
As per Mr Adnan’s assessment, Pakistan would require a 15 to 20 percent devaluation before going to the IMF and with the decision to approach them for a bailout has been taken further depreciation may be needed considering the new conditions that they may impose.
He believes, “Dollar could be trading around Rs180rs by June 2019.”
However, the KSE-100 index bounced back on news that Pakistan would be approaching the IMF for a bailout and surged over 900 points in the first hour of intra-day trading before falling to 38,316.79 points, an increase of 418.50 points as news of the rupee devaluation sunk in.
Also, adding to the worries was the $628 million decline in foreign exchange reserves of the central bank last week to $8.4 billion, which was the sharpest fall in years leaving the country with import cover of barely 1.5 months.
On Monday, the rupee had plunged to Rs129.50 against the dollar in the kerb market due to the prevailing economic and political certainty that had gripped the currency and capital markets.
It nosedived by Rs2.10 against the dollar in the open market, as the currency dealers refused to exchange the greenback in Karachi, according to media reports.
On Monday, the inter-bank market rate of the rupee to a dollar stood at Rs124.27 according to SBP’s market to market revaluation rate sheet.
Consequently, as the supply of dollars dries up in the open market, it will push up demand creating a dearth of the greenback and rupee is expected to nosedive further.
A report published by World Bank on Sunday said despite a modest rebound recently, there was a 10 percent depreciation compared to the beginning of the year and a 14 percent depreciation compared to one year before.
Express Tribune last week reported IMF and Pakistan had disagreed over the exchange rate parity, as the State Bank of Pakistan (SBP) believed the exchange rate of Rs137 to a US dollar by end of the current financial year 2018-19 would be enough to address the challenges.
According to sources, IMF’s determination was to the contrary and they wanted the rupee to be traded above Rs145 to a dollar.
Pakistan has been facing a crisis on the external front, with burgeoning trade & current account deficits and depleting foreign exchange reserves.
Pakistan’s gross external financing requirement has been estimated at $22-25 billion for the current financial year FY19.