Uneasy calm in forex market not over yet


ISLAMABAD JULY 24 (TNS):  Amid a raging debate about whether the local currency will fall again, the uneasy calm that prevailed in Pakistan’s forex market prior to the July 5 massive decline in the rupee’s value is still not over.

Recently released data showed that the current account (C/A) deficit swelled to around $12.1 billion in FY17 from $4.867bn in FY16. Most bank treasurers are almost sure the State Bank of Pakistan would not hesitate in letting the rupee fall again. For them, it is not a question of ‘why’ but just a question of ‘when’.

The treasurer of a local bank says:  “Let’s see when the SBP lets the rupee find its real value. The rupee has been put on life support in an oxygen tent after the sharp and swift reaction of the Ministry of Finance, but fundamentals of the external account are not lending any support to the local currency. “I believe that the SBP will now allow a gradual depreciation of the rupee. It will not keep it where it is today,” he says.

From July 6 to July 20, the rupee has regained much of the value it had lost to the dollar in the July 5 downward readjustment. On July 20 it closed in the interbank market at Rs105.34 against the dollar, up from Rs108.24 on July 5 and slightly down from Rs104.90 on July 4, one day before it depreciated in one go.

This swift recovery in the rupee’s value is not due to any substantial change in the supply of dollars in the interbank market, implying that the credit for it goes to the central bank’s intervention, senior bankers say. They, however, remain tight-lipped on whether the SBP intervened by selling dollars in the interbank market or by persuading banks to postpone or minimize their own dollar buying as much as they can.

Although the current account deficit is just too huge and should theoretically take its toll on the rupee’s health, the overall balance of payments (BOP) improved in FY17 giving policy makers a solid reason to argue that things are not that bad on the external sector. In FY17, a surplus of $1.946bn was booked in the BOP against a deficit of $2.652bn in FY16. But this happened against the backdrop of heavy external borrowing of no less than $10.1bn, according to sources in the Ministry of Finance. About 37pc, or $3.7bn, of this amount came from China alone.

The BOP surplus of FY17 cannot provide a justification for keeping the rupee artificially stable now, particularly when the C/A deficit has risen past $12bn and SBP forex reserves are falling, say senior bankers.

Forex reserves held by the SBP fell to $15.478bn as on July 14 this year from $18.271bn at end-December 2016, a sharp decline of 15pc in just six and a half months. The ballooning current account deficit and falling reserves of the central bank have a more direct impact on the dynamics of exchange rate than a BOP surplus and that, too, obtained through external borrowing.