KARACHI: Turmoil gripped the foreign currency markets all day on Tuesday as the rupee saw its largest single-day drop against the dollar in over a decade. By the time trading in the interbank market closed, the rupee had dropped by 7.5 per cent, or Rs9.37, to settle at Rs133.67.

The interbank market is where banks trade foreign currency with each other to meet requirements of international trade and other bulk uses.

The fall began almost immediately as the market opened at 9am. “The State Bank called us in the morning and said ‘there is no level today’,” said a source in the banking system who daily oversees large interbank market operations. He was referring to the support that the State Bank provides to the exchange rate through whispered advice to traders.

“So when the market opened, the first quote we saw was for Rs130, and then it shot up to Rs135,” he said, underlining the speed of the drop since the market had opened with the dollar at Rs124.27. “Some trades happened at Rs138 as well before the rate started drifting down.”

Dollar rises to Rs137 in open market, Rs133 in interbank

The speed of the fall presented a contrast with how similar devaluation episodes in the recent past have worked themselves out. “Those were slower,” said the source, referring to the two devaluations that occurred in 2018 and the last one in December 2017. “Because the adjustment was rapid this time round, it was less nerve wracking for traders, because we knew very early in the day where it was all going.”

As has now become the norm, a press release was issued by the State Bank at the close of trade, announcing the event and giving the reasons behind it. “This movement broadly reflects the current account dynamics and also the demand-supply gap in the foreign exchange market,” the State Bank said, alluding to the continuous declines in the country’s foreign exchange reserves that are now at dangerously low levels.

“We barely have import cover of 1.6 months,” tweeted Hammad Azhar, Minister of State for Finance, in the middle of the day just as the markets were reeling from the impact of the drop. “Our financing requirements are $28 billion for this financial year. $8bn of debt repayment is also due this year.”

The State Bank seemed to agree with this view that a growing shortage of foreign exchange reserves is forcing the hand of the government to take drastic steps, even as the government’s team is in Bali for programme talks seeking balance-of-payments support from the International Monetary Fund.

“State Bank is of the view that this adjustment in the exchange rate along with lagged impact of recent hikes in the policy rate and other policy measures to contain imports would correct the imbalances in the external account,” said the SBP at the close of trade.

Mr Azhar agreed, telling Dawn in a late night message that “as uncertainty and rumours end, the exchange rate will settle too. Just like the stock exchange that recovered by 606 points in a single day”.

The interbank market was the epicentre of the event all day, but the open market, where retail customers buy and sell their foreign exchange, was also impacted by the development.

A brief stop at various exchange company outlets showed that dollars were generally not available for buyers in the open market while selling was also very low. The selling rate touched as high as Rs140 in the open market, but it fell back to move along the interbank rates later in the day.

The Forex Association Pakistan said the selling price at the close of the day was in the range of Rs135.20 to Rs136.50, but the Exchange Companies Association of Pakistan said the closing price of dollar was in the range of Rs133.25 to Rs134.50.

Most of the currency dealers said nobody was selling dollars while top tier exchange companies confirmed that dollar availability was extremely poor. Currency dealers in different parts of the city said they only exhibited selling rates, but practically no selling took place. Companies like Pakistan Exchange and Paracha Exchange also said that trading was thin and only small amount of dollars were sold.

Bankers said that the after loss of over 7.5pc there was no chance for further devaluation of the local currency. “This was a shock for the market, but this could be an end as it looks that the government has achieved its target in one go,” said a senior banker. The event, he speculated, seemed to be the fulfilment of some kind of precondition for an IMF loan.

Only the night before the finance minister issued a dramatic late night announcement of his government’s intention to approach the IMF for balance of payments support. He mentioned that other options such as assistance from “friendly countries” were still on the cards. But his government’s spokesman, Fawad Chaudhry, poured cold water on that expectation in a television appearance on Tuesday night, in which he stretched diplomatic protocol to tell the anchor that funds from Saudi Arabia and the UAE were indeed available, but the conditions attached were so disagreeable that the government decided against availing that option.

Pakistan’s current account deficit, which measures the difference between total inflows and outflows of foreign exchange from the economy, has been rising by an average of $1.35 billion per month. In the last fiscal year ended June 2018, the current account deficit was $18bn.

The State Bank argued that the current account deficit narrowed in August, but a consistent increase in oil import bill on account of rising international prices had raised the cost of imports.

Recent data released by the SBP shows that its foreign exchange reserves now stand at $8.4bn (a five-year low), while commercial banks’ reserves went down to $6.5bn.

“The local currency cumulative declined by 21pc in the past nine months,” said a report by Shajar Research.

Published in Dawn, October 10th, 2018