Pilgrimage Takes Toll on Pakistan Rupee Reeling From Yuan Shock

  • China's devaluation, equities slide add to Hajj spike
  • Central bank says there is sufficient supply of dollars

Pakistanis embarking on Islam’s holiest pilgrimage are soaking up dollar supplies, driving the rupee to the weakest level since March 2014, as they prepare to seek blessings in Mecca -- and buy some gold.

The annual spike in demand for the Hajj season was exacerbated this year as investors sought the safety of the greenback after China’s Aug. 11 yuan devaluation prompted Pakistan’s central bank to allow a decline in the rupee. The nation’s benchmark stock index has lost more than 9 percent since China’s shock move, which spurred weakness in emerging-market currencies across Asia and led to devaluations in Kazakhstan and Vietnam.

The premium money changers charge for dollar sales peaked at 2.5 rupees higher than the interbank exchange rate in August, compared with 0.7 a year earlier, said Muhammad Zafar Paracha, general secretary of the Exchange Companies Association of Pakistan. The rupee declined to as low as 104.475 against the greenback on Sept. 11 as the central bank cut back on intervention in an effort to revive exports, which fell in each of the last four months.

“A majority of those headed to Saudi Arabia for Hajj have approached us to buy dollars,” said Malik Bostan, Karachi-based president of the Forex Association of Pakistan. “Demand rises to as much as $10 million a day from the usual $7 million, and that is where we need help from the central bank.”

Dealers Summoned

The State Bank of Pakistan last month summoned money changers to get details of a shortage of the U.S. currency. In a Sept. 6 e-mail, the monetary authority said that while rates in the interbank and kerb markets depend on their own flows, sentiment in one does affect the other.

“As much as 80 percent of all currency transactions happen through the interbank market,” said Taha Javed Khan, a Karachi-based economist at Elixir Securities Pakistan Ltd. “The kerb market doesn’t have a lot of liquidity options and depends on the central bank to inject money when they’re running short.”

Exchange companies are allowed to import dollars to meet customer needs, the monetary authority said in July. Commercial lenders can also buy currency directly from the SBP, it said in August, adding that it has sufficient stock of the greenback to meet demand.

“We are bringing in $10 million minimum and maximum $18 million on a daily basis,” said Paracha. “Apart from Hajj demand, there was also the rupee devaluation driving dollar purchases. And then there is the problem of dollars being smuggled to Afghanistan and Iran.”

Smuggling, Gold

Almost $40 million to $50 million is sent illegally every day to Afghanistan, said Paracha, whose 60-member association of money changers has asked the government to crack down on 20,000 to 25,000 unlicensed rivals. SBP spokesman Abid Qamar, while declining to comment on any possible smuggling, said that the authority keeps a check on money changers through on-site inspections and a monitoring mechanism that involves regular reporting.

Pakistan’s total foreign reserves were at $18.7 billion as of Sept. 11, the central bank said in a Sept. 17 e-mailed statement. The rupee closed little changed at 104.38 a dollar on Tuesday, according to prices from local banks compiled by Bloomberg. The currency was little changed this quarter before plunging 2.1 percent on Aug. 25.

Standard & Poor’s and Moody’s Investors Service lifted their credit outlooks on Pakistan’s debt to positive from stable this year as political tensions eased, after being stoked by opposition allegations of vote rigging in the 2013 election.

Demand for the greenback is pushed up also by people who tend to buy jewelery while traveling to the Middle East. More than 140,000 Pakistanis will take part in the Hajj this year, followed by the Eid holidays.

“People consider it auspicious to buy gold in Saudi Arabia because it is the holiest land in the Muslim world,” said Haroon Chand, Karachi-based president of the All Pakistan Jewellers Association. “Prices are lower and the ornaments well-made. People don’t buy for business purposes, but more for things like weddings and gifts.”

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