Rupee drops to new low of 298.93 per dollar in interbank market

KARACHI: The rupee plunged on Thursday, setting a new record low with traders panicking about the economic repercussions of the deadly fallout following the former primer minister Imran Khan’s arrest and the summoning of the army to quell violence.

The currency slipped 3 percent or 8.71 rupees to an all-time low of 298.93 a dollar in the interbank market.

The local unit fell 2 rupees against the dollar in the open market. The Exchange Companies Association of Pakistan’s (ECAP) rates showed that the rupee was trading at 299 to the dollar as opposed to 297 on Wednesday.

The rupee remained steady against the dollar, fluctuating between 283-284 since Tuesday. However, weakening of the currency has accelerated as street violence between police and protesters intensified after Khan was detained by the anti-corruption agency in Islamabad this week.

As deadly violence continued, the government called the military and warned the demonstrators against launching any more assaults on strategic installations. The news that some anti-government and anti-military protestors had died in the violent clashes worried traders. Because of this, the situation grew increasingly unpredictable and chaotic. “Rupee weakness was mostly driven by poor sentiment as protests continued for the third day. With a highly volatile political situation, traders were concerned with serious economic disruptions, which caused the Rupee to slump,” said Tresmark in a client note.

Additional factors weighing on the rupee include April’s lower-than-expected remittance numbers, dwindling foreign exchange reserves, and default fears amid uncertainty surrounding the IMF programme. Despite the fact that many analysts had anticipated stronger remittances during Ramazan, the actual flow was 29 percent lower than in April 2022. The patience and confidence of foreign investors were also waning. Eurobond yields maturing in 2024 tanked to 49 (yields at 107 percent) while 2031 bonds were trading at 36 cents. Intriguingly, the current political situation underwent a dramatic about-face when the nation’s Supreme Court ruled that Khan’s detention by the anti-graft agency was unlawful and ordered his release from custody. With the Supreme Court’s decision, many traders expect a recovery in the rupee in days ahead. “We expect that the local currency will rebound and appreciate by 10-15 rupees as soon as the political temperature subsides,” said Zafar Paracha, the secretary general of the ECAP.

The rupee shouldn’t be under pressure in the interbank market because of the political uncertainty, he said. “We should consider the interbank market players’ role, as they frequently manipulate the currency during times of political instability. Consequently, their forex gains are rising.” In the currency market, there is not much demand for dollars because imports are still just necessities, according to Paracha. The IMF stated that it is still working with Pakistan on securing funding and policy guarantees to reach an agreement on the Ninth Review of the $6.7 billion loan agreed in 2019. However, Pakistan needs a sizeable amount of additional financing in order to successfully complete the long-stalled bailout package. The steadily worsening impact of the twin deficits plaguing Pakistan’s external and fiscal accounts has now been overtaken by a third deficit, which is the trust deficit, said Ehsan Malik, CEO of The Pakistan Business Council. “The IMF does not trust the current or the previous government. Our traditionally friendly countries are shy to come forth with assistance,” Malik said. He said the latest development on arrests, riots, and uncertainty on the timing of elections, as indeed the outcome of elections when/if they take place, are hardly likely to get IMF to step forward and sign the staff-level agreement. “The more relevant (and disturbing) question is whether the economy is really the topmost priority for the government or the opposition. Neither has any clear plans for reforms and they don’t talk to each other on the economy.”