The rupee depreciation, debt servicing dents forex reserves
June 22, 2012
The rupee is constantly under pressure mainly due to the increasing oil imports, lack of foreign investment and repayments to the International Monetary Fund. The Pakistani currency’s journey to new peaks has created alarming situation, the rupee may touch even Rs 100 mark against Unites States Dollar if balance of payment situation is not improved. Country’s foreign exchange reserves are in danger.
The government has projected a current account deficit of $4.8 billion for next fiscal year which is also exerting pressure on the local currency against other currencies. The rupee has touched record low of 94.80 against the greenback in interbank market and 95.40 in kerb market during last week.
The data shows that the exchange rate averaged Rs 87.32 in first half of the current fiscal year, 1HFY12, but rose up to Rs 91.29 in second half of the fiscal, 2HFY12, recording an average increase of 5 percent. Financial experts attribute decline to high oil prices and strained US-Pak relations, resulting in discontinuation of aid and suspension of disbursements of payments under the Coalition Support Fund. The 2HFY12 also witnessed depletion of forex reserves, widening of Balance of payments deficit and the relative behavior of prices in different countries as the major causes of exchange rate decline.
The only factor which supported balance of payment throughout the year remained the remittances. During eleven months of current fiscal year, 11MFY12, remittances from overseas Pakistanis jumped by 25 percent to $12.069 billion. The inflow of remittances has also supported the foreign exchange reserves of the country which remain above $16 billion till May 2012 but have started falling in June. Any decline in the remittances at this critical point may jeopardize the BoP position of Pakistan and may dent foreign reserves situation.
“Other factors that Pakistan was expecting to contribute to deficit financing were Coalition Support Fund, US aid, 3G auction and Etisalat payments. However, non-materialization of these inflows exerted pressure on financial account and rupee started weakening against US dollar”, say a research report by the Arif Habib Limited.
Pakistan is also paying back to the IMF with three tranches of $1.2 billion and other debt obligations around $1.7 billion made by the government. The outflow of dollars, debt servicing, has depleted liquid reserves. The country is bound to repay $1.53 billion to the IMF in the upcoming fiscal year, FY13, which will further exert pressure on the rupee.
According to AHL, the exchange rate, as per purchasing power parity theory, is affected when the two countries have different inflation rates. Economies having higher inflation demonstrate currency depreciation and vice versa due to varying purchasing power over a period of time. Pakistan’s inflation rose from 11 percent to 12.3 percent during April-May 2012, where as inflation in US dropped down from 2.7 percent to 2.3 percent month on month bases MoM in the same period. With PPP theory holding true, rupee depreciated to record lows during this period. If the trend persists, rupee remains under a threat of further erosion in value.
In 1HFY12, SBP only intervened to balance out excessive fluctuations in the exchange market, but could not instill adequate liquidity to stabilize the market in FY12. “Keeping in view the current exchange rate situation, unless proper measures are taken to stabilize it on a sustainable basis in FY13, we foresee Pak rupee falling in a band of Rs 97-98 per US dollar by the end of 2012 .Having said that, if oil price continues to decline and also, if Pakistan receives the expected grant of $1.2 billion under CSF and other financial assistance, the fiscal and trade deficits could be bridged and thus, stabilize exchange rate to some extent”, the report observes.