After a stable FY11, the rupee exchange rate has remained very volatile in FY12 and lost 7.8% against US$ – 2.5% in just the last fortnight. Panic in the currency market began when the loan repayment of US$400mn to the IMF was made. Furthermore, the SBP Governor’s statement in the Washington Post on ‘State of Pakistan Economy’ also put pressure on Pak Rupee. He predicted a huge stress on the economy and likelihood of foreign exchange reserves melting down due to IMF repayments. Pakistan has to pay off US$4bn to the IMF in FY13 and resultantly the reserves are likely to dip to US$8bn, from the current level of US$16.5bn. Additionally, the Governor ruled out a further monetary easing in the upcoming policy reviews due to substantial government borrowings from the SBP, which have reached Rs442bn in FY12 so far. The SBP expects inflation to exceed from the current level of 11% in the next few months. Interestingly enough, the SBP Governor has also clearly stated that all the re-payments to the IMF are to be made from the SBP reserves. Furthermore, there are speculations in the market of further depreciation and the exporters have started to wait on their proceeds, while importers want to book exchange for their upcoming imports.
What is economics indicating?
Fundamentally speaking, the odds have favoured the rupee depreciation as we believe:
