Debt repayments build pressure on rupee

Payment of $2.5b in next six months keeps dollar demand high.

KARACHI: Hefty debt payments have continued to pile on the pressure on the rupee which has touched new lows against the dollar with major support lacking from dwindling foreign investment and less-than-expected growth in exports.

In the inter-bank market, the rupee dropped to 90.68 against the greenback last week, sparking concerns that inflation, which had dropped to single-digit after many months, would once again race ahead and add to the woes of people. Importers were said to be making forward booking of dollars for six months at 94 rupees.

“When it is necessary, the central bank takes steps to prop up the currency. Import of goods is the key factor behind the fall in rupee’s value,” said State Bank of Pakistan spokesman Syed Wasimuddin.

However, according to market watchers, the debt payments have played a major role in rupee’s slide as Pakistan will have to repay $2.5 billion to international lenders in the next six months, including $1.2 billion to the International Monetary Fund (IMF) in February.

Besides the debt, exports this year are expected to remain static at last year’s level at around $25 billion, thanks to the sharp fall in cotton prices in domestic and international markets and crippling energy shortages which have brought industries to their knees in Punjab, said Hamad Aslam, Research Head of Lakson Investments.

In the province, all industries, particularly the major export industry, textile, have been closed because of suspension of gas supply for a month, making it almost impossible to meet export commitments on time.

Imports, on the other hand, were expected to stay high following the increase in oil prices in the wake of growing tensions between Iran and the United States over the former’s nuclear programme, Aslam said.

At the end of last year, the US government enforced new measures that will make it harder for most countries to buy oil from Iran. The European Union is also expected to announce some form of ban on Iranian oil by the end of January. The stand-off between the West and Tehran has kept oil prices above $100 per barrel.

On the positive side, a steady flow of remittances from overseas Pakistanis provide a major cushion for the rupee. This year, remittances are expected to be around $12 to $12.5 billion. However, Aslam said the expatriate workers might hold back the remittances for some time in the face of falling rupee to get further good rates.

To ease pressure on the currency, he underlined the need for boosting investment, particularly foreign investment, in manufacturing industries, which would help increase the country’s exports substantially. But hurdles like energy shortages and law and order issues have to be cleared.

Exchange Companies Association of Pakistan Chairman Malik Bostan pointed out that exchange companies received an average of $10 million every day, of which 80 per cent was injected into the inter-bank market and the rest was kept to meet foreign currency needs of travellers, students going abroad for studies, patients going for treatment and others.

He stressed that investment should be stepped up, but rather than investing, some disgruntled businessmen were taking their capital to other countries because of power and gas shortages and insecurity.

Another area that Bostan said should be focused on was tourism, which had been badly shaken by fighting between security forces and militants over the past many years in northern parts of the country.

Published in The Express Tribune, January 9^th, 2012.