Rupee slides as banks take on oil role
By Syed Fazl-e-Haider
QUETTA, Pakistan - The Pakistani currency has taken a turn for the worse
against the US dollar, sliding to 84 rupees to the greenback, after the central
bank last week decided to shift responsibility for payment of all oil import
bills onto the private sector from December 14.
The decision to make commercial banks responsible for the payments, a move
previously expected to be taken next year, is behind the rupee depreciation on
concerns it will lead to
excessive volatility in the foreign exchange market, market specialists said.
The US$10 billion annual oil payment is a significantly large amount for the
private sector to handle and will attract speculative forces seeking to benefit
from fluctuating exchange rates. Critics say the move came much earlier than
the given deadline of February 1 on pressure from the International Monetary
Fund (IMF).
The rupee is predicted to remain under pressure, as the country's external debt
piles up and foreign investors continue to shy away. Local analysts argue that
the rupee is losing ground also because of a lack of confidence on the part of
foreign investors, who have almost stopped coming to Pakistan due to the
increasing number of terrorist attacks in major cities and towns.
The rupee fell to a year low of 84.14 against the US dollar at the close of the
inter-bank market on Monday, as investors started buying the dollar heavily in
anticipation of a rise in its demand from next week, The News reported, citing
local currency dealers.
The rupee depreciated from last week's closing level of 83.69 for a US dollar
after the central bank announcement.
In November 2008, the local currency fell to as low as 85 to the dollar before
support in the form of the $3.1 billion first tranche of IMF funds. The country
was forced to go to the international lender to avert a balance of payments
crisis after its foreign exchange reserves tumbled to $3.2 billion in November
2008 from a high of $14.24 billion in October 2007.
Local currency dealers believe the rupee will continue to depreciate as the
banks will hold onto their reserves in view of the high and regular demand for
dollars. Higher oil prices will mean dollar demand will rise in the inter-bank
market, which may increase opportunities for speculators to benefit from gaps
in supply and demand.
When oil was available at an average price of $68.5 per barrel, the country
imported $4.3 billion worth of the fuel in the first five months of the fiscal
year ending next June. The oil bill may exceed $10.5 billion if the oil price
averages close to the current level of about $73.
Commercial banks have about $3.5 billion in their accounts, which means the
inter-bank market will rely heavily on a continuous inflow of dollars to meet
the new requirement.
"The dollar went up despite [Pakistan's] reasonably high foreign exchange
reserves of about $13.7 billion while another IMF tranche of $1.2 billion is
expected this month," the Dawn newspaper reported, citing a money market
analyst.
A declining currency should usually be a boost for exports, making them cheaper
on the international market, but might not be of much help in the case of
Pakistan.
Depreciation of the local currency can push up inflation as the cost of
imported commodities will rise, also adding to the debt servicing burden, The
News quoted Hurrah Shah Ad, head of research at Invest Cap, as saying, "It
won't help exports, as historical trends suggest that the exchange rate has a
minimal effect on exports, as most of the exported goods use imported inputs.
The country pays around $3 billion a year in debt servicing. The trade deficit
shrunk to $3.9 billion in the July-October period from $6.5 billion at the same
time last year, suggesting a slowdown in the economy."
External debts and liabilities reached a new peak of $55.2 billion during the
first quarter (July-September) of the current fiscal year against $52.33
billion at the end of the previous fiscal year. The current upsurge is mainly
due to the IMF's standby loan package, initially of $7.6 billion and increased
to $11.2 billion in July.
The payment on imports of crude was scheduled to be shifted to the private
sector from next February 1, said a report recently published in Dawn. "The IMF
has asked the Pakistani negotiators to get rid of the crude oil bill earlier
than the schedule given in the previous agreement," the report said, citing a
high-ranking source.
The central bank was caught in a difficult situation from the middle of last
year, when oil prices surged to $147 per barrel. The increase siphoned off
reserves, which fell to about $6.5 billion, creating a serious threat to the
balance of payments. The government's first agreement with the IMF in November
2008 emphasized that the central bank would cease making payments of oil import
bills by February 2010.
The bank first shifted to private sector payments for furnace oil, from
February 1. This fuel accounts for 20% of the total bill. On July 15, the
central bank then instructed banks to make all purchases of foreign exchange
from the inter-bank market related to the import of petroleum-related products,
except for crude oil.
The possibility of excessive volatility is based on an annual $10 billion oil
payment by banks, which means weekly, inter-bank payments that could range
between $180 million and $200 million, according to a report in Business
Recorder. Since the trade gap between exports and imports is almost double
this, tilting towards a deficit, any additional payments are bound to put
pressure on the rupee.
Under the IMF demands related to their loan, the government has decided to
increase power tariffs by 18% in two phases next year - 12% in January and 6%
in April. The local business community has strongly resisted the decision,
saying it will bring already ailing industries to the verge of total collapse.
A declining economic growth rate and a decreasing currency have led people to
expect more inflation and an increase in unemployment. The power and gas
tariffs are likely to put an additional burden on industry and squeeze gross
margins. Local manufacturers forecast more industrial closures and job losses
over the next year. The middle-class income group is slipping fast into the
poor class, while the vulnerability of the lower classes is being further
aggravated.
Syed Fazl-e-Haider (www.syedfazlehaider.com) is a development
analyst in Pakistan. He is the author of many books, including The
Economic Development of Balochistan (2004). He can be contacted at sfazlehaider05@yahoo.com
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