Rupee slide continues, hits fresh low

KARACHI: The rupee on Wednesday sank to a new record low against the dollar, primarily under pressure from a surging import bill, analysts said fearing more losses down the road as the country remains mired in political and economic instability.

The rupee hit an all-time closing low of 190.02 per dollar, its second consecutive record low in the interbank market. It weakened 1.36 rupees or 0.72 percent.

Traders and analysts are fretting about the persistent decline in the foreign exchange reserves amid hefty current account and trade deficits, and higher debt payments.

The dried-up foreign currency inflows coupled with a delay in the revival of the International Monetary Fund (IMF) bailout and a lack of financial support from friendly countries is adding to the pressure on the local unit.

Moreover, political unrest owing to PTI’s protest campaign against the government is eclipsing the new economic team’s focus on economic firefighting. Khan has announced to march with thousands of his supporters towards Islamabad on May 20 to demand new elections to add to the troubles of the economically-challenged PML-N led regime.

The market awaits the outcome of Prime Minister Shehbaz Sharif and top PML-N leaders’ meeting with the party supremo Nawaz Sharif in London for any clues on when the new government would withdraw energy subsidies to restart IMF loan negotiations, and whether it will agree to announce fresh elections.

Since the start of this fiscal year, the rupee has fallen 20.4 percent.

The currency dipped to historic low of 194/dollar in intra-day trade in the kerb market before ending at 192.50, below the previous close of 190. It depreciated by 2.50 rupees.

“The rupee depreciation is due to ongoing political and economic uncertainty. The REER [real effective exchange rate] is well below 100, which means rupee should settle stronger once uncertainty subsides,” said Saad Hashemy, an executive director at BMA Capital.

“Key events that would help alleviate pressure on the exchange rate are phasing out of subsidies on fuel, progress in IMF program talks, and political clarity, and timeline of elections,” Hashemy added. It’s a major question whether the central bank is intervening to curb the volatility when its reserves are dwindling. However, there is less possibility for the State Bank of Pakistan to intervene in the market to prop up a sinking rupee as forex reserves are bleeding and can barely cover less than two months of imports.

The reserves held by the SBP fell to $10.5 billion in the week that ended on April 30, down $5.8 billion from $16.4 billion in February.

The new spell of political unrest and nose-diving rupee may force the SBP to hike interest rates faster than assumed.

“The local currency hitting new lows is worrisome for the economy because it is underlined by the government’s inability to stabilise forex reserves and curb current account deficit. Interest rates may also rise sooner than expected,” said Komal Mansoor, the head of research at Tresmark.

The SBP raised the policy rate by 250 basis points at an emergency meeting on April 7 to ensure stability in the financial markets amid political uncertainty.

Meanwhile, BMA’s Hashemy also expects a surprise rate hike to also help alleviate pressure on the rupee. However, interest rates are already high where Karachi interbank offered rate is close to 15 percent, much higher than the policy rate which is 12.25 percent.

The rupee is losing ground tracking decline in regional and other major currencies.

The dollar strength and high commodity prices are impacting regional and major currencies. The Indian rupee also made an all-time low yesterday, according to Tresmark’s Komal Mansoor.

“Yuan, euro, and sterling have all depreciated to multi-year lows. Emerging economies’ CAD (current account deficit) is also surging,” she added.