Left to market forces, the dollar takes a roller coaster ride and falls to Rs137.5

Source:  Samaa Published in Current Affairs on Monday, December 3, 2018

In a sign that the PTI government has adopted free-float exchange rates, the dollar is going through a roller coaster ride. It fell sharply by Rs2.5 on Monday morning, only a day after recording its largest intraday gain of Rs9.5.

One dollar was trading at Rs137.5 in the opening hours of the interbank market compared to Friday when it peaked at an all-time high of Rs143.5 before settling down at Rs140.3 at the close of market.

Majority of analysts SAMAA Digital spoke to are attributing this volatility in the exchange rates to the free market phenomena. The government has let the market forces of demand and supply decide the rupee’s real value against the dollar, which is causing this movement. Some say it will settle around this level while others predict it may breach Rs140 by June next year.

Finance Minister Asad Umar was a big critic of his predecessor’s policy of managing exchange rates and stated even before assuming charge that his government will not intervene and let the market decide the rupee’s value. A free float regime or free markets was also one of the conditions put forward by the International Monetary Fund during its negations with Islamabad for a bailout package.

Under former finance minister Ishaq Dar, the State Bank of Pakistan frequently intervened in the market to keep exchange rates around Rs105. Whenever excessive demand had pushed dollar rates up, the central bank would sell its own dollars in the market and bring it down to the same level. However, after Dar stepped down, the rupee went through several rounds of devaluation. This year alone it has depreciated 25% against the dollar.

Pakistan is seeking an IMF loan programme because its monthly imports are more than double of its exports, which means for every dollar earned we spend two. Because of this dollar drain, we have fewer reserves to pay for essential imports (oil, raw materials, machinery etc), and to repay our foreign loans (more than $90 billion).

According to the latest data, the government has $8 billion in reserves, which is the lowest level of foreign exchange reserves in the last four years and is not enough to sustain even two months of imports. If we don’t increase our dollar reserves we may default on our payments.

Since taking oath in August, Prime Minister Imran Khan has been seeking bilateral support to plug our trade gap and ease pressure from our foreign exchange reserves. However, apart from the $1 billion injection by Saudi Arabia, there have been no additional packages received by Pakistan from friendly countries like China, Malaysia and the UAE.

The latest round of rupee depreciation came on Friday after the talks between the IMF and the government were delayed for two months. The dollar rose too much and this correction was due, say some analysts.

The central bank also raised its policy rate by 1.5%, more than what market was expecting. The higher than anticipated rise in interest rates may have affected market sentiments because it may help cut down some of our imports and reduce the trade gap. However, this volatility in the exchange rate may continue till there is clarity on the IMF loan.