Currency Perspectives

 December 08, 2009

The State Bank of Pakistan in its final move towards a flexible exchange regime – solely targeted towards reserve accumulation & maintenance of export competitiveness – will be completely phasing out the provision of its foreign exchange reserves for making oil payments from Dec 14’09. This has prompted a speculative attack on the Rupee where the PkR to US$ parity breached the level of PkR84/US$ post the announcement. The graph below clearly illustrates that the phasing out of furnace oil & diesel payments on 15th Jan’09 and 1st Aug’09, respectively, did not lead to a sharp PkR exchange rate weakening which many corners were predicting. In contrast, after gaining strength in the first two months post IMF financial program in Nov’08, the PkR exchange rate has only gradually, albeit persistently, depreciated by ~0.5% per month (please see graph below).  We expect this trend to continue despite the recent exchange rate volatility exhibited since the announcement of shifting crude oil payments to the interbank market.