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
