The central bank's strict exchange policy measures have failed to stop the fall of rupee against dollar. Analysts said the major reason of this failure is the political uncertainty in the country. As a result the rupee has witnessed depreciation by some 10 percent in the last six weeks.
The rupee is continuously depreciating against the dollar since the last eight months and the central bank's measures seem to have failed in arresting the slide especially in the interbank market. In May 2008 the State Bank of Pakistan imposed 35 percent Letter of Credit (L/C) margin on all imports except of oil and food imports aimed to narrow down the increasing trade deficit and to stabilise the rupee.
On July 8, SBP took some other measures to strengthen the rupee and the central bank suspended the afternoon trading session by Banks Treasuries for all types of foreign exchange transactions.
In line with these measures, the SBP also announced that it will now make 100 percent oil payments, besides suspending Forward Cover Facility (FCF) against imports and advance payments against imports with a cut to 25 percent with immediate effect to rationalise the foreign exchange market.
In addition, the SBP instructed exchanges companies to close their NESTRO accounts and imposed a ban on the export of UAE Dirham and two other currencies by the exchange companies.
However, all these steps provided a temporary relief to the rupee and after a short time the rupee is once again depreciating against the dollar and the dollar has touched a new peak of Rs 76 in domestic currency market. Analysts said that continued political upheaval in the country is hurting the economy badly and the SBP measures to keep the rupee at a sustainable level have also been come ineffective.
While, on account of the continued political uncertainty, a shortfall in the foreign exchange receipts and the exemption of several items from LC cash margin requirement have also put pressure on the exchange rate.
The rupee has depreciated by around 10 percent during the current fiscal year, as it had stood at Rs 68.45 to the dollar on June 30 in interbank market and on August 13, 2008 it was Rs 75.10. In the last one week dollar has surged by Rs 3.44 percent to Rs 75.10 in interbank market from Rs 73.25, while in the open market it has gone up by Rs 2.05 to Rs 75.30 from Rs 73.25.
SBP earlier had also intervened in the currency market with the sale millions of dollar in the market to curb the increasing demand for dollar. However, at present the SBP is not taking such steps due to the declining trend in the foreign reserves.
Overall the country's foreign reserves have plunged by some 1.125 billion-dollar during the last five weeks. The reserves were at 11.284 billion dollars on June 28 2008. They were 10.1591 billion-dollar on August 2, 2008. During the same period reserves held by SBP have declined by 1.65 billion dollars to 6.968 billion dollars from 8.625 billion dollars.
The Analysts said that the rupee is under pressure due to the increasing current account deficit and slow foreign inflows, besides political events in the country. Official statistics revealed that the country faced a record 14.016 billion-dollar current account deficit during the last fiscal year 2008, as compared to 6.87 billion dollar in 2007. Net Foreign Investment declined by 38 percent during the last fiscal year due to massive outflows of portfolio investment because of political uncertainty and negative reports about the country's economy.
Overall foreign investment stood at 5.193 billion in 2008 as compared to 8.42 billion dollar during the fiscal year 2007. "At present, we are expecting some more measures for rupee appreciation by the central bank, however the situation would not improved until a sufficient supply chain is maintained along with political stability," analysts said. They said that demand for dollar expected to further increase in the next few days.