The week in focus

The rupee strengthened last week because of a steady flow of dollars into the economy.

The rupee strengthened against the dollar last week and stood below 85 levels because of a steady flow of dollars into the economy, which is expected to keep inflation under check and provide relief to the government in foreign debt repayments.

A host of factors have contributed to the rupee’s strength, which included over $2 billion worth of exports per month over the last three months, a record increase in remittances to $6.9 billion in eight months (July to February) of the current fiscal 2010-11 and a sharp fall in current account deficit to $98 million so far this year compared to a huge $3 billion last year.

In addition to these, a steady stream of dollars flowing into the market after the State Bank allowed export of foreign currencies, except for greenback, to bring dollars in exchange has met the demand for import payments, particularly for oil purchases.

However, according to Invest and Finance Securities Research Head Khalid Iqbal Siddiqui, oil and food commodities, which the country imports to meet its needs, could pose a threat to the stability of the rupee. Any sharp rise in their prices could put pressure on the country’s financial position, eventually threatening the rupee.

Threat in long run

“It seems that the rupee may come under pressure in the long run as crude prices in the international market have shot up to above $110 per barrel in the wake of the earthquake and tsunami in Japan and political instability in the Middle East,” said Khurram Schehzad, Head of Research at InvestCap research house.

Already in February, oil imports soared around 70 per cent compared to the previous month. Pakistan meets around 60 to 70 per cent of its oil requirements through imports.

“Importers are buying dollars in advance due to which the premium on forward cover has risen and that may mount some pressure on the rupee,” said Schehzad, referring to the lifting of a ban on advance booking of dollars for import payments by the State Bank a few days ago.

However, he said, if the rupee appreciates the government’s debt payments will come down and inflation will remain subdued. Already, inflation has dropped to 12.9 per cent in February compared to around 14 per cent in January.

Dollar supply improves

Forex Association of Pakistan President Malik Bostan said exchange companies have played a key role in improving supply of dollars after the State Bank set aside restrictions on export of UK pound, euro and UAE dirham about two months ago. “Exchange companies sell these currencies in Dubai and bring dollars within three days, which props up the economy,” he said.

Earlier when the restriction was in place, he said, people were bringing foreign currencies from abroad and exchanging these in the informal market because banks offered low rates for currency exchange. “This diverted dollars to illegal channels and stemmed their flow to the formal economy, putting pressure on the country’s external payments,” he said.

Bostan said exchange companies have provided $200 million to banks in the past two months after the lifting of the ban, adding these companies were meeting demand of oil, gold and car importers as well as investors. Despite that, the rupee has remained stable because of steady inflows.

Discussing the fear of illegal flight of foreign currency abroad, he said proper checks were in place at the airports where customs examined the currency package and State Bank officials sealed it. Exchange companies are required to bring dollars in exchange for foreign currencies in three days and they are also bound to submit reports regularly to the State Bank.

the writer is incharge Business desk for the Express tribune and can be contacted at [e-mail]

Published in The Express Tribune, March 28^th, 2011.