Bloomberg News

Dollar-Hoarding Shows Pakistanis Don’t Trust Rupee Rally

March 26, 2014

A Roadside Money Changer

A roadside money changer counts coins at his stall in Karachi. The hoarding of greenbacks in the kerb market, where a fifth of Pakistan’s foreign-exchange transactions are conducted, shows money changers are unconvinced the local currency’s gains will last. Photographer: Asim Hafeez/Bloomberg

The Pakistan rupee’s biggest rally in 16 years has been nothing but a tease for Nazim Salim.

Seeing it as an opportunity to settle an old debt in dollars cheaply, he sought out Karachi’s money changers to buy $200. Yet all four traders Salim approached in the kerb market, as it is known to Pakistanis, had the same answer: They had no dollars to sell him.

The hoarding of greenbacks in the kerb market, where a fifth of Pakistan’s foreign-exchange transactions are conducted, shows money changers are unconvinced the local currency’s gains will last. While the rupee has been lifted to a nine-month high by pledges of more than $8 billion in foreign aid, the nation’s economy remains hampered by a deteriorating trade balance, power shortages and a Taliban insurgency in the north.

“With the dollar now in a big, rare retreat, I figured this is the perfect time to end this debt,” Salim said over the sound of vendors hawking tea, biryani and tobacco in the streets below the apartment where he makes and sells dental crowns. “I couldn’t believe it.”

After losing 46 percent of its value over 10 straight years of declines, the rupee has gained 7.5 percent in 2014, touching 97.6 per dollar on March 24, the strongest since June 4, before closing at 97.96 yesterday. Its 7.1 percent advance this month is the best performance among all currencies tracked by Bloomberg.

Forecast Retreat

Standard Chartered Plc and KASB Securities Ltd., the local affiliate of Bank of America Corp., predict the rally will fade. Standard Chartered, which gets about three quarters of its earnings from Asia, says the rupee will weaken to 104 per dollar by year-end as the effects of the foreign aid wear off. KASB sees a slump to 108 by June.

“Given the speed at which the dollar came down against the rupee, currency exchangers might be sensing it’s temporary,” Raza Jafri, the head of research at Karachi-based brokerage AKD Securities Ltd., said in a March 20 interview. “People think the dollar falling below 100 rupees is a one-off thing caused by a surprise inflow. If I was a currency exchanger, I’d hang on to my dollars because if more inflows don’t come in, it won’t take long for the rupee to slip.”

Starting Up

Pakistan’s troubled economy, blighted by the effects of the decade-long war across the border in Afghanistan, was the reason Salim started his two-person business in his apartment at the end of 2012. After a decade of working low-paid jobs in the dental industry, he moved his young family out to his ancestral village 200 kilometers (124 miles) to the northeast and borrowed start-up capital from a wealthy family friend, avoiding banks because of Islam’s restrictions on interest-bearing loans.

“I figured enough was enough,” Salim, 31, said while preparing a crown for an elderly female patient. “I’d been struggling and, with a son now, I knew I needed more stability, especially financial. I was ready to mortgage my wife’s jewelry and even handed over the papers of my house for the money.”

When it came to getting the dollars to repay the loan, Salim turned to the kerb market that Standard Chartered estimates accounts for 20 percent of currency transactions in the $225 billion economy.

Armed Guards

In a narrow lane closed to cars in Karachi’s upscale Clifton neighbourhood, a dozen of these businesses are watched over by private security guards armed with shotguns and automatics. Nearby, branches of Western Union Co. and HSBC Holdings Plc vie for space with market traders offering traditional sweetmeats and canteens serving tea and dishes of lentils with yoghurt and onion rings.

The money changers’ business has evolved from cash changing hands across rickety stalls to computerized counters behind glass windows, much like the bureaus de change at Karachi’s Jinnah International Airport to the east of downtown.

While the kerb market is still less closely regulated than banks, Pakistan’s central bank last year required money lenders to limit the gap between the prices at which they buy and sell foreign currency to 0.25 rupees -- another reason they’re hoarding dollars. In the end, Salim was forced to repay his friend in rupees, losing more than $55 on the deal.

“Open-market currency dealers aren’t confident the latest rupee rates will be sustained,” Furqan Punjani, an economist for brokerage BMA Capital Management Ltd. in Karachi, said in a March 20 phone interview. “They think these levels are artificial and expect the dollar will rise again because of factors including the current-account deficit.”

Foreign Aid

The International Monetary Fund approved a $6.78 billion loan for Pakistan in September, while the Gulf Cooperation Council gave the country $1.5 billion of aid this month and the U.S. released $352 million from the Coalition Support Fund earlier this year. That cash, plus the prospect of $500 million from the country’s first overseas debt offering since 2007, is helping support the rupee even as the trade deficit widens.

Pakistan’s monthly trade shortfall has averaged $1.75 billion so far this year, up from $1.63 billion in the whole of 2013, official data show. Gross domestic product is on course to achieve the official target of 4.4 percent growth in the 12 months through June, Finance Minister Dar said this month, after falling short last year.

“The rupee strengthened only because of the unexpected inflow that surprised everybody,” Sayem Ali, a Karachi-based economist at Standard Chartered, said in an interview on March 20. “The rally is more sentiment-driven. Fundamentals are still essentially weak.”

To contact the reporters on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net; Khurrum Anis in Karachi at kkhan14@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net; James Regan at jregan19@bloomberg.net Anil Varma


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