Rupee tumbles more than 11 percent in 2019

KARACHI: The rupee was the worst performer in Asia as it tumbled more than 11 percent in 2019 to hit record low of 164/dollar in June, driven by balance of payments pressures, deteriorated market sentiment, and central bank adjustments to address overvaluation.

Domestic currency fell 1.8 percent to 141 against the dollar in the interbank market during the first quarter of the outgoing year.

As a precondition of the International Monetary Fund’s (IMF) programme, the State Bank of Pakistan (SBP) adopted a market-based exchange rate in place of the fixed regime. Resultantly, the currency devalued by 14 percent versus the greenback over the six week period preceding the IMF programme. However, it has appreciated by three percent since then.

Rupee closed at 154.84 to the dollar on Tuesday, the last day of calendar year 2019.

Transition to the market-determined exchange rate has helped stabilise the rupee. It has enabled the local unit to find its new equilibrium, correcting the exchange rate overvaluation of the last five years.

The IMF’s Executive Board in July approved a 39-month arrangement of $6 billion under the Extended Fund Facility (EFF) to support Pakistan’s economic reform programme.

The fund has disbursed a total of approx $1.45 billion loans to Pakistan under the EFF so far this year.

Analysts expect the currency to lose past year’s gains against the dollar in 2020.

Yaqoob Abubakar, an analyst at Tresmark, an application that tracks financial markets, said the currency was unlikely to maintain the current trend for a longer period of time.

The outlook for domestic currency would depend on fast-changing geo political conditions and Pakistan’s achievement in the implementation of the 27-point financial reform agenda to improve money laundering and terror financing regulations committed with the Financial Action Task Force (FATF).

FATF’s Paris meeting scheduled in February would decide whether the country exits from the grey list of the global finance watchdog or not.

“The appreciation in rupee is due to the positive initiatives taken by the government along with fewer payments,” Abubakar said.

“The rupee position could change if the government was unsuccessful in achieving targets set by the IMF. In that case market sentiments will be changed that may lead to weaken the pair in future,” he added.

An analyst Zeeshan Azhar at Foundation Securities predicted depreciation. “We believe the rupee is likely to see five percent depreciation annually from now onwards. We expect dollar to be Rs159 by June ’20, while around Rs163 at the end of CY20.”

Another IMF precondition was tightening of monetary policy which helped attract foreign inflows into Pakistan’s debt market.

Azhar at the same time believes foreign inflows in the government securities would likely continue (inflows of $2.5-$3 billion were expected during FY20) in view of the ‘carry trade’ opportunity and would provide stability to rupee-dollar parity, despite high foreign debt servicing requirement during FY20.

“We believe concerns on abrupt outflow of this money are overplayed as interest rates are not expected to decline materially in CY20,” he added.

Moreover, substantial inflows are expected in foreign direct investment (up 78 percent YoY in 5MFY20) on account of privatisation of Oil and Gas Development Company, Pakistan Petroleum Limited and two power plants (Haveli Bahadur Shah and Balloki) through which the government expects to attract $2 billion or Rs300 billion.

Fitch Solutions, in a recent report, expects the SBP to keep the interest rate on hold at 13.25 percent in FY2019-20 (July-June), following its decision to keep monetary policy unchanged in the final committee meeting of the year on November 22.

“We at Fitch Solutions forecast the SBP to continue to keep its policy rate on hold through FY2019-20 (July – June), having implemented 100bps worth of hikes in the current fiscal year,” Fitch report said.

“That said, we believe that the central bank is likely to lower its policy rate in the second half of the year (first half of FY2020-21), as it looks to create policy space for future jumps in inflationary pressures.”

Saad Hashmey, an executive director at BMA Capital, said, “I expect rupee to remain stable in the near term. Given strengthening forex reserves and encouraging feedback from the IMF, successful continuation of the IMF program and continued foreign inflows could keep the rupee at current levels for the entire 2020.”

Analysts say bright prospects for the country’s economic stability, especially a falling current account, is likely to support the currency.

The current account deficit dropped 73 percent to $1.821 billion in the first five months of the current fiscal year. The deficit is expected to narrow further in the coming months because of slowdown in demand and higher foreign inflows.

The central bank’s foreign exchange reserves reached more than $11 billion following fresh disbursement from the IMF. However, the reserves held by the SBP stood at $10.907 billion as of December 20, from $7.203 billion at the end of December 2018.