The Pakistani rupee continues to slide against the greenback, creating a panic in the local currency market. The currency lost 4.5 per cent in the open market and 2.4 per cent in inter-bank trading against the US dollar in the first 50 days of the new government led by the prime minister Nawaz Sharif.
Before the new government was installed on June 5, the currency was being traded at 99 rupees in the open market and 98 rupees in inter-bank trading against the US dollar. After less than two months, the dollar is now being traded as high as 104 rupees in the open market with an inter-bank rate of 101.
The rupee suffered a steep fall against international currencies including the US dollar despite the IMF recently agreeing to provide a new loan of more than $5 billion to Pakistan.
It has become difficult for account-holders of foreign currency to have access to their holdings, while exchange companies are not being provided dollars by the bank. The dollar is transferred to Pakistan through banks, which provide dollars to exchange companies on their demand. The commercial banks are reportedly not providing dollars to the exchange companies, which bring dollars from Dubai by selling other currencies.
In view of the increasing demand for the dollar, market analysts predict further deterioration for the rupee. The central bank has, however, so far taken no step to stop the freefall of the currency. Ishaq Dar, Pakistan's finance minister, had to hold meetings with the central bank's governor, currency dealers and the exchange companies last week to develop a strategy to deal with the fluid situation in the currency market.
The currency dealers believe that a sharp increase in gold imports over the past six months increased the dollar demand that led to draining from the open market. Dealers have demanded an immediate government ban on gold imports, while the exchange companies have demanded intervention from the central bank.
The widening gap between the dollar price in the open and inter-bank markets poses a threat to the inflow of remittances from overseas Pakistani workers through legal banking channels because a high dollar rate in the open market could revive "hundi and hawala", the illegal channels of remittances.
The rupee is also in freefall because of a negative outlook on Pakistan's economy. Constant depreciation is attributed to the widening current account deficit, excessive government borrowing, absence of foreign flows, increasing oil imports and repayments to the IMF.
The Pakistani currency has depreciated by almost 11.30 rupees against the dollar since December 31, 2011 because of falling foreign reserves and a high demand for the dollar in the local currency market. Pakistan's current account deficit widened to $2 billion in the first 11 months of the last fiscal year, which ended on June 30. There are concerns over declining foreign exchange reserves, which are persistently in decline.
They dropped to $10.502bn in the week ending July 12, from $10.543bn the previous week, according to the central bank. Forex reserves held by the central bank stood at $5.521bn while commercial banks' reserves were $4.981bn.
Last month, the IMF agreed to sign a fresh loan agreement worth $5.3bn with the new Pakistani government to rebuild the country's foreign exchange reserves to stave off a balance of payment crisis. The loan deal raised hopes for more foreign inflows into the country. The World Bank and Asian Development Bank, which had suspended their programmes for more than three years, are expected to resume programme lending to Pakistan and disburse $400m to $500m each by next January.
Following the deal with the IMF, Pakistani officials also expect to receive about $5bn from multilateral lenders in six months and from the UAE's Etisalat thanks to privatisation proceeds of Pakistan Telecommunication Company Limited (PTCL).
Etisalat held up about $800m as proceeds of the PTCL privatisation held in 2005.
Under the previous government led by the former prime minister Yousuf Raza Gilani, the rupee continuously weakened against the US dollar.
The currency, which is presently valued at 101 rupees to the dollar, had closed the fiscal year in June 2011 at 85.97 to the dollar. It depreciated 4.82 per cent against the dollar in 2011, while it lost 1.53 per cent of its value in 2010.
Under the former government of Shaukat Aziz (2004-07), foreign exchange rates enjoyed stability and the rupee did not lose its value against the US dollar, remaining at about 60 to the dollar.
Syed Fazl E Haider is a development analyst in Pakistan. He is the author of books including The Economic Development of Balochistan