Pakistan rupee hits record low on oil, equity worries

May 5th, 2008 Aimon · No Comments

The Pakistan rupee fell 1 percent to a record closing low on Monday and dealers said it could fall further this week on dollar buying by oil importers and concern that capital outflows will result from a falling stock market.

The rupee ended at a record low close of 65.76/81 to the dollar, having fallen to a life low of 65.93/66.03 during trade, down from its previous record closing low of 65.12/14 on Saturday.

The currency has fallen more than 4.5 percent against the dollar since the end of March, and is down 6.75 percent so far in 2008.

“The picture is grim and it’s difficult to say what the solution is at this point,” said a local bank dealer.

Dealers said the rupee could weaken to as low as 70 per dollar in coming days, and a fall in foreign exchange reserves had left little room for central bank intervention to prop it up.

Pakistan had foreign exchange reserves of $12.6 billion at April 26, nearly $4 billion less than a record high on Oct. 31, 2007.

The country’s trade deficit for the first three months of 2008 was $6.2 billion. Imports totalled $11 billion in the quarter, a 46 percent increase from the same period in 2007.

“The sentiment is weak and there are some payments due as well,” said a dealer at a foreign bank.

Record oil prices have blown the country’s import bill.

But the rupee could also suffer as a result of the stock market’s reversal since late April.

Fears that Pakistan’s month old coalition government will splinter have damaged investor confidence, and there are concerns that foreigners could withdraw funds from Pakistan.

The Karachi Stock Exchange (KSE) benchmark 100-share index ended 1.90 percent lower at 14,673.13 points on Monday, its lowest level since Feb. 15, the last trading day before a parliamentary election that resulted in defeat for President Pervez Musharraf’s allies and brought the coalition to power.

While the political outlook remained uncertain, the economic outlook has deteriorated, with inflation at a 13-year high, growth slowing and the trade and fiscal deficits widening.

Economic growth is seen slowing to 6 percent in the fiscal year ending June 30, after averaging 7 percent in the previous four years.

Dealers said there was speculation the central bank, which closely shepherds the exchange rate, may consider aggressive monetary tightening before its next scheduled policy review in July to curb import demand.

Last month, Governor Shamshad Akhtar told Reuters the central bank was exercising “strong vigilance” over financial markets and would “continue to support foreign exchange rate stability to curb excessive short term fluctuation”