KARACHI: Fearing a devaluation of the rupee, Pakistanis have started piling up dollars in their foreign currency accounts.

This has resulted in an increase of $1.2 billion in foreign currency deposits of commercial banks in just four months.

Bankers and currency dealers were unanimous in their opinion that the sudden rise in the reserves of commercial banks was because of the conversion of the local currency into dollars.

Bankers link growing demand for the greenback to fears of an approaching devaluation

Reserves of commercial banks rose to a record high of $5.9bn on Sept 22 against $4.7bn in May.

“There is an expectation of a devaluation, which is pushing Pakistanis to convert their rupee deposits into dollars. This is reflected in the increase in commercial banks’ dollar deposits,” said Husain Lawai, vice chairman of Summit Bank.

“Local currency deposits of banks have gone down. They fell Rs329bn in the first two months of 2017-18. It shows where that money has gone,” he said.

He believes the rupee devaluation will likely be in the range of six to eight per cent. But it can be up to 12pc if the government approaches the International Monetary Fund for a loan, he added.

Other senior bankers, however, downplayed the role of dollarisation in the recent downtrend in local currency deposits. The decline in rupee deposits, according to one, can also be attributed to seasonal factors, such as the unwinding of “window dressing” that usually takes place at the end of June.

He acknowledged that the dollar reserves held by commercial banks have shown a sharp increase, but noted that this can equally be attributed to rising exports in the first two months of 2017-18 as well as an increase in remittances.

Currency dealers remain jittery as they believe that the fear of devaluation has grown in the wake of the eroding influence of Finance Minister Ishaq Dar.

Mr Dar, who is facing charges of corruption, has so far steadfastly opposed the rupee’s devaluation against the dollar. Currency dealers said the government has shifted all burden to the open market by doing away with travel, Haj and other quotas.

“Pakistanis have been buying dollars from the open market and depositing in their foreign currency accounts, fearing a large devaluation of the local currency,” said Zafar Paracha, secretary general of the Exchange Companies Association of Pakistan.

The rupee was devalued 3.1pc in the first week of July. The decision was backed by the State Bank of Pakistan (SBP), but the finance minister denounced the move. He forced banks to bring back the dollar rate at the pre-devaluation level and also appointed a full-time governor of the central bank.

Currency dealers said the SBP has been pushing them hard not to sell dollars to the public apparently to stop the conversion of the local currency into dollar deposits.

Mr Lawai said the decline of the SBP’s reserves is alarming. The government is planning to raise $1bn from the international debt market as it gears up to pay a penalty of up to $800m for failing to honour its commitment with a Turkish firm in the rental power case.

Experts believe the increasing outflow of dollars from the country is also one of the reasons for the rising fear of devaluation. The country paid over $8bn in debt servicing in 2016-17 while repatriation of profits and dividends amounted to $2bn.

Published in Dawn, September 29th, 2017