The rupee has been under pressure, particularly in the past few weeks, because of increased demand for dollars from importers, particularly for oil payments as a result of rising international prices. According to the State Bank of Pakistan, the persistent weakness of the rupee has added about Rs315 billion to public debt without borrowing a single penny. The debt could go further up if efforts were not made to stabilise the currency. This is an extraordinary situation, wherein devaluation of Rs7 against the dollar has increased the total debt.

Pakistan is faced with serious economic crisis that required extraordinary measures. The rupee’s depreciation from 62 a dollar to 70 during last few weeks poses serious threat to the economy. Rupee has depreciated against the dollar by 10.8 per cent in the past five months against only 2.7 per cent depreciation in six months ended December 2007. The government wants about $4 billion inflows by end of the current fiscal year to maintain its foreign exchange reserves that have been declining owing to surging import bill. The trade deficit stood at little over $17 billion during the first 10 months of current fiscal year.

As corrective measures to deal with current economic scenario, the SBP decided to raise the policy discount rate by 150 basis points to 12 per cent on May 23. It has also increased Cash Reserve Requirement (CRR) for all deposits up to one year maturity by one to nine per cent, while keeping the CRR for deposits of over one year maturity unchanged at zero percent. In addition, the Statutory Liquidity Requirement (SLR) has been increased by 100bps to 19 per cent of the total time and demand liabilities. Earlier this week, the bank had also taken measures regarding major currency export by money changers to end speculative trading.

Negative sentiments persisted in the local currency market on the opening day of the week in review, where the rupee further extended its weakness against major currencies. Sharp decline in the rupee/dollar parity was observed on the interbank market as the rupee suffered fresh losses of 80 paisa and 70 paisa respectively on the buying and selling counters. Persistent demand for dollars by the importers to cover their payment needs exerted downward pressure on the rupee on May 19. At close, the dollar was seen changing hands at Rs 69.40 and Rs69.50, against previous week close of Rs68.60 and Rs68.80.

Falling trend in the rupee/dollar parity persisted on May 20, as investors remained busy making fresh purchases of dollars. The rupee reportedly lost 20 paisa on the buying counter and another 30 paisa on the selling counter, changing hands versus the dollar at Rs69.60 and Rs69.80. Investors were seen diverting their funds from stocks to dollars after the strengthening of American currency and steep fall in the share prices.

On May 21, the State Bank of Pakistan intervened in the currency market to resist rupee from falling beyond Rs70 against the dollar. The dollar had almost disappeared from the market. Unusually high outward payments and slow inward receipts warrant SBP intervention to smoothen the volatility. The rupee/dollar parity improved after the central bank intervention as rupee managed to recover 15 paisa against the dollar, which was trading at Rs69.45 and Rs69.55 towards the close of the day.

On May 22, the rupee resisted fresh losses after preventive measures announced by the State Bank of Pakistan helped the rupee maintain its overnight firmness against the dollar. The rupee recovered five paisa more and traded at Rs69.40 and Rs69.50 paisa in the inter-bank market. On May 23, the rupee managed to recover 90 paisa against dollar which was seen changing hands versus the dollar at Rs68.50 and

Rs68.60 as a result of measures taken by the central bank. At this level, the rupee in the inter bank market trimmed it losses against the American currency this week after posting 10 paisa gain over the previous week close.

In the open market, the rupee suffered sharp fall against the dollar, losing 45 paisa on the buying counter and another 35 paisa on selling counter to trade at Rs 69.10 and Rs69.20, amid speculative trading on the first trading day of the week in review after closing last week at Rs68.65 and Rs68.85. The rupee continued its slide versus the dollar on the second trading day and shed another 30 paisa trading at Rs69.40 and Rs69.50 against the dollar.

The weakening trend in the rupee/dollar parity persisted in the open market on the third trading day, when the rupee posted some fresh losses of 40 paisa against the dollar, which closed the day at Rs69.80 and Rs69.90 on May 22. On May 23, however, the rupee managed to rebound versus the dollar gaining 100 paisa to trade at Rs69.00 and Rs69.10. Some currency analysts were of the view that market witnessed an appreciation of 1.2 per cent in rupee value against the dollar due to cautious steps by the central bank. This week, the rupee in the open market lost 35 paisa against the dollar.

Versus the European single common currency, the rupee continued to weaken and lost 40 paisa to trade at Rs106.70 and Rs106.80 on May 19 against previous weekend’s Rs106.30 and Rs106.40. The rupee, however, managed to gain 50 paisa on May 20, when the euro was quoted at Rs106.20 and Rs106.30. But the recovery in rupee/euro parity proved short lived as the rupee failed to hold its overnight firmness and fell sharply on May 21, shedding Rs3.24 and changing hands versus the euro at Rs108.44 and Rs108.54.

On May 22, the rupee shed Rs1.76 more to trade at Rs110.20 and Rs110.30 against the European common currency. But on the following day it revert back to May 21 position after gaining Rs1.76 to trade at Rs108 44 and Rs108.54 on May 23. During the week in review, the rupee lost 74 paisa versus the European single common currency amid fluctuations.

In the international financial markets, the dollar rebounded from a 2-1/2 week low versus the euro on the week’s opening day. The euro dropped to a session low of $1.5487, surrendering overnight gains that had hoisted it to a 2-1/2 week high of $1.5632. It was last quoted at $1.5505, down 0.4 percent on the day. The dollar pushed to intraday peaks of 104.69 yen and 1.0572 Swiss francs. The pound was down 0.28 percent on the day at $1.9510, having hit its lowest since late February last week at $1.9363.

On May 20, the dollar fell as talk of higher euro zone interest rates prompted investors to increase exposure to the euro, though losses were capped by inflation data that muddied the US interest rate outlook. In late New York trading, the euro rose earlier to a three-week high of $1.5679. It last traded at $1.5663, up one per cent over the preceding day. The dollar fell 0.7 to 103.62 yen and 1.6 per cent to 1.0358 Swiss francs, with analysts pointing to concern about the credit crunch. Sterling rose to a two-week high versus the dollar. It was up one per cent, to as high as $1.9687, on track for its biggest daily gain in two months.

On May 21, the euro surged as high as $1.5791, closing in on a record peak above $1.60 touched last month. It last traded at $1.5789, up 0.8 per cent on the day. The dollar dropped to a one-week low of 102.97 yen, before recovering to 103.01 yen, still down 0.6 per cent. The dollar dived 1.1 per cent to 1.0250 Swiss francs. Meanwhile, against its Canadian counterpart, the dollar fell 0.9 per cent to C$ 0.9832, The pound was down a third of a percent against the dollar at $1.9623.

On May 22, the dollar rose broadly but support remained fragile as oil touched new record highs and a gloomier Federal Reserve growth forecast added to fears that the US economy may be heading toward stagflation. The euro was last down 0.5 per cent at $1.5703 but remained near the top of a well-worn $1.54-$1.58 range that has persisted for most of the month. The yen also wilted, as traders expected surging oil prices to hurt Japan’s economy, a net importer of energy. The dollar rose 1.2 per cent to 104.23 yen. Sterling was up more than half a per cent to $1.9848, recovering from an early slide to hit its strongest since early May.

At the close of the week on May 23, The dollar steadied as oil prices eased on profit-taking after hitting fresh record highs, but the currency stayed in sight of a one-month low against the euro on worries that inflation could lead to a deeper US slowdown. The euro was little changed from late US trade at $1.5726 after rising to a one-month high above $1.5800 a day earlier, but the yen came under pressure, as rising energy prices would also hurt Japan’s growth, which is showing signs of softening. The dollar was up nearly 0.1 per cent at 104.12 yen after slipping below 103 yen the previous day. Sterling was down 0.2 per cent at $1.9763.