Depositors continue to suffer as banks maintain low deposit rates in an extended stable monetary policy regime while rising inflation continues to erode the net deposit rate further.

Average annualised return on all fresh deposits of all banks (excluding only those applicable on the interbank market) fell to 3.02 per cent in August this year from 3.30pc in the same month last year.

Compare this return with the headline inflation of 3.4pc this August and you will find out that the deposit rate has already turned negative. This is, by no means, good for the economy. (Inflation in September shot up to 3.9pc and by all likelihood the wedge between the average fresh deposit rate of banks in September and the inflation number of that month will widen further).

Moneyed people are resorting to a long-forgotten way of retaining value: buying dollars from the open market in anticipation of a looming rupee depreciation

Bank borrowers, particularly big ones, are getting cheap loans as the money market remains liquid despite banks’ increased lending to the government. Certainly, this is good for the economy.

Between July 1 and Sept 22 this year, banks’ net lending to the private sector was minus Rs92 billion against that of Rs296bn in the same period of the last year.

This indicates a decrease in gross lending amid increased credit retirement in the first quarter of the 2017-18 fiscal year compared to the same quarter of the preceding year.

On the other hand, banks’ lending to the federal government between July 1 and Sept 22 shot up to about Rs215bn against net retirement of government loans of Rs266bn in the year-ago period.

Since political uncertainty is high ahead of general elections next year, the stock market is nervous and the index is shedding value, sending signals to people that it is better to sell more and buy less.

Changes in rules and regulations governing the construction industry in Karachi has already left little chance for parking funds in the real estate — at least for some time.

It is against this backdrop that moneyed people are resorting to a long-forgotten way of retaining value: buying dollars from the open market in anticipation of a looming rupee depreciation.

On July 5, the State Bank of Pakistan (SBP) let the overvalued rupee find its real market worth. But the government intervened in an unprecedented way, compelling the central bank to restore the exchange rate. Since then, everything has been said and written for and against rupee depreciation.

But now it’s not about the perceived merits or demerits of depreciation. It’s all about day-to-day functioning of the forex market that really matters.

“Metaphorically speaking, you cannot just stop a pregnant woman from giving birth if it is time for delivery, regardless of whether the arrival of the newborn is perceived to be good or bad for the extended family,” commented the treasurer of a local bank.

“Either the rupee is overvalued or it is not. If it is overvalued, no amount of preaching about the merits and demerits of depreciation can stop a correction in the exchange rate. Delays can be harmful, like in case of a delayed childbirth,” he siad.

The recent rise in dollar buying from the open market can be seen as a signal that at least a segment of the forex market is anticipating exchange rate correction in the near future.

A stronger indication could have been the conversion of rupee bank accounts into foreign currency accounts. But whether this is happening will be evident only after the central bank publishes its September report with details of FE 25 (foreign currency accounts).

By August this year, the total amount placed in this account was $6.978 million, little changed from $6.963m in June. “So, we cannot see any sign right now that rupee accounts are being converted into FE 25 (in anticipation of rupee depreciation),” said an SBP official.

But given our weak key external account fundamentals and the fact that the rupee is still overvalued, markets continue to expect a change in exchange rate any time during this quarter.

“The central bank was perhaps waiting for handling the March-June quarter external debt payments. Besides, the July 5 move of allowing the rupee to find its market worth had to be reversed on government intervention. So, I guess the central bank can now make more rapid adjustments in the dollar-rupee parity than it did till Sept 30,” says a bank treasurer.

The rupee has lost about half a per cent of its value against the dollar since July this year.

Whether the local currency sheds value gradually, but still faster during this quarter than the past quarter, cannot be predicted.

Prime Minister Shahid Khaqan Abbasi recently said in a Bloomberg interview that the rupee “is not on the table”.

Meanwhile, Pakistan’s forex reserves fell to $19.763bn on Sept 29 from about $21.402bn at end-June.

This big fall of $1.639bn in just three months indicates that external-sector worries are far from over, despite the current account deficit in July-September, the balance of payments in July-August showed a surplus of $1.385bn against that of only $21m in July-August 2016-17.

In the first two months of this fiscal year, the current account deficit also expanded to $2.601bn from $1.287bn in the year-ago period.

Bankers are eagerly awaiting the first-quarter balance-of-payments data. “If the July-September current account deficit expands further and if balance of payment surplus shrinks, the exchange rate would certainly come under pressure and perhaps even the government would reconsider its position (on any move by the central bank to depreciate the rupee),” says a source close to the SBP.

Published in Dawn, The Business and Finance Weekly, October 9th, 2017