ISLAMABAD, 7 May — Shifted from Dubai, which way goes the Pakistani rupee? If anyone asks you which way goes the rupee, it will, anyway, be difficult to answer. The latest Central Bank moves, banning conversion of some currencies in Dubai, raises more difficult questions, which are still to be answered.
It may affect expatriate Pakistanis living in the Gulf, Saudi Arabia and the Middle East more directly.
The Pakistani currency had gone down past Rs.64 to a dollar in late April. The speculators were forecasting the dollar may rise as high as Rs.70. The State Bank (SB) then banned money changers to take foreign currencies other than the dollar to Dubai. Dollar already was not going to Dubai, officially. In Dubai, the money changers were converting these currencies into dollars and bringing them back to Pakistan.
The SB says this exercise was widely being misused by money changers to retain a good part of the money in Dubai. It was also used to manipulate the dollar supply in the Pakistani market, make it fluctuate, and to make a quick buck. It also tampered with efforts aimed at stability of the rupee and the exchange rate mechanism, bank officials says.
By creating shortages of dollars in the Pakistani market, and through other manipulative means, they made hefty profits, but generally left the rupee more emaciated then ever before. The Dubai market will loose an estimated $2.0 billion annually in business as a result of the SB ban on taking out non-dollar forex, open market and banking industry sources tentatively estimate.
SB ban order affected 42 currencies. Of these six have been ordered to be handed over to the National Bank of Pakistan (NBP) for conversion. The six included: US dollar, British pounds, Deutsche mark, UAE dirham, Saudi riyal and Kuwaiti dinar.
Later, on May 2 the SB added 36 minor currencies that it said can be traded in the international forex market through NBP. The NBP is now issuing a rate sheet of the six currencies, showing the exchange rates for the whole day, irrespective of any fluctuations during the day.
The kerb market estimates that 36 minor currencies totaling around $3 million-a-week change hands in the open market. On receipt from money changers, NBP will sell the minor currencies abroad — most likely in Dubai. The total accumulated inventory of minor currencies as of early May was $8 million.
After the first announcement, banning the currency conversion in Dubai, the daily dollar demand in the kerb declined to $1 million, compared to $3 to 4 million a day that has been normal in recent months. The decline was due to the fact that the dealers, and buyers and sellers wanted to watch, first, the reaction of the SB decision on the currencies and the market.
How much forex the money changers are likely to sell to the NBP? Malik Bostan, president of Forex Association of Pakistan, estimates that the annual amount could be around $1.5 billion, but he could not estimate as to how much they will buy back from NBP in the form of dollars. Bankers hope that the picture of a buying-selling pattern will emerge in six to eight weeks, that will reflect the amount of 42 currencies, the moneychangers will sell to NBP in exchange for dollars.
The SB expects that the new game plan will plug the leakage that it said was occurring when money changers were taking their forex to Dubai for conversion into dollars.
In that process, they were allegedly bringing back only 10 to 15 percent of forex compared to what they were taking out for conversion. If “the leakage” was really that much, the country is likely to gain. However, the question then is: If that was so, why did SB wait to act for years? The rupee, in March and April, was declining. On April 6, the parity declined to Rs.64.25 to a dollar, while the interbank rate was Rs.61.57.
The scheduled official debt repayments, import needs, as well as the continued SB buying from the kerb, has kept the open market dollar rate on the rise. The SB, for instance, purchased $1.3 billion from the open market in the first nine months of the current fiscal 2001 to pay for imports, make official debt repayments and to keep a reasonable level of official forex reserves. The purchase from the kerb in fiscal 2000 was $1.6 billion.
As a result of the rising demand for dollars, the rupee has depreciated 17 percent since July 20, 2000 when it was allowed to float freely in the market on the basis of demand and supply.
In the week that followed the SB’s new policy regarding six currencies, the rupee seemed to have gained about Rs.0.30 in relation to the dollar, as the greenback came down from Rs.64 plus to around Rs.63.85. But, will it stay that way? One will have to watch out.
The interbank market first eased a bit but, rose again in the opening days of May to Rs.61.50 to a dollar in view of the heavy buying by the banks for their cooperate clients and importers. At that point the inflow of export receipts stayed low, while a dollar shortage had been created by money changers in the wake of SB decision banning smaller currencies to be taken out for conversion in Dubai and to bring dollars back to Pakistan.
The speculators were, generally, staying out of the market waiting to see the impact of the SB decision on the market. This too, led to a shortage of dollars in the open market, that started pushing the dollar once again. While the rupee was declining the SB did not intervene in the market — a policy it has adopted for the past several months.
This policy owes itself to the IMF directions that have asked SB not to intervene in the market to bolster a sagging rupee, but to use the interest rate instrument to correct the situation.
