Lahore - The exchange rate of US dollar hit high in country’s interbank market on Monday. More than Rs2.10 hike in a single day took the US currency exchange rate to Rs104.10 –almost one and a half years high.
Financial managers say the exchange rate is likely to further go up to Rs105 in a few days as presently dollar is being traded at Rs105 in Dubai money market, which is considered as a model by Pakistan currency market.
The depreciation of rupee will cause a hike in inflation, besides increasing the cost of import, resulting in further gap in trade deficit.
The financial experts call it the consequence of imposition of withholding tax on banking transactions, as majority of traders have resorted to buying dollars and making transactions in dollars, keeping them in lockers instead of depositing them in their accounts.
Currency dealers also insisted that Haj pilgrims were the biggest buyers of foreign currencies, including Saudi riyals and US dollars. Moreover, after the US-Iran nuclear deal the import volume from Iran to Afghanistan as well as Pakistan has also increased, enhancing demand of greenback in Pak-Afghan region. They said that dollar is also being used to smuggle several goods including petroleum products, cements from Iran.
One of the major reasons is also China, which is creating higher demand for the US currency in the local market as Pakistan’s import from China has registered a sharp growth during last couple of years.
Despite currency swap between China and Pakistan no banking ties have been set up properly yet, forcing Pakistani importers to trade in greenback with China through Hundi system. However, the importers claimed that the rate, currently standing at Rs 104.10, is being manipulated by influential exporters who are trying to create instability by buying large quantity of dollars.
The State Bank has expressed deep concern over the fast appreciation of dollar and asked currency dealers to explain why US currency crossed Rs104 in the open market.
The central bank was found extremely perturbed over the recent rise in the dollar rate despite the fact it had been providing additional support to the open market.
The dollar was kept under control in the inter-bank market while sudden demand pushed the dollar rate to as high as Rs104 in the open market.
Malik Bostan, President of Forex Association of Pakistan explained that the situation changes before Haj because last year during this season the dollar appreciated by Rs4 from Rs98.50 to Rs102.50. Whereas currently the price increased from Rs103.20 to Rs104.
The State Bank was also expecting a decline in the dollar prices as it had already allowed currency dealers to bring dollars from Dubai to directly in their accounts. The facility has been provided for two months.
Financial experts said that several Asian countries have recently devalued their currencies which developed an expectation in Pakistan that the rupee will also be devalued. They said that China, Japan, Indonesia, Malaysia and some Middle Eastern countries devalued their currencies, resulting in higher investment in dollar in Pakistan.
“It was not the rupee depreciation; in fact, the dollar has been gaining against all major currencies since the beginning of 2014. It also gained against rupee.”
Hafeez Ahmed Khan, former SVP at HBL, said that State Bank had recently asked currency dealers to correct their faults and improve performance. The currency dealers were told to install biometric system at their branches and ask for a copy of CNIC from customers.
Noted economist Dr Salman Shah said that State Bank had been artificially holding the dollar back, not letting it cross the Rs102 mark. The greenback might go further up within no time if the SBP stops influencing the market.
He said high exports and low imports can bridge the ever increasing trade gap which could protect the local currency from mounting pressure of dollar.
The sharp fall in oil prices, with declining gold prices, forced major investors to park their liquidity in the dollar. Even high reserves of about $18b of Pakistan could not infuse strength to the exchange rate in favour of rupee.
According experts, Pakistan’s foreign exchange reserves are mostly borrowed while annual debt servicing for foreign debts in 2014-15 was about $7 billion, constantly putting pressure on rupee.