As Finances Wobble, Rupee Devalued Further: Propping Economy ‘Needs Some Kind of Bazooka’

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JUL 16, 2018 (BE2C2): The State Bank let Rupee devalue further on Monday as finances wobble before national election in nine days.

The rupee has been devalued for the fourth time this year– it dropped almost 14 percent since December, seeking to slow the depletion of foreign-exchange reserves before the election. The country’s foreign reserve erosion has been the biggest (34 percent) in Asia over past year, according to Bloomberg and IMF tracking data.

The currency, whose rate is set by the central bank, dropped as much as 5.3 percent to 128 per dollar at the close on Monday, according to a statement released by SBP. The rupee is the worst performer in Asia this year, according to a basket of 13 currencies compiled by Bloomberg.

The selling rate in the open market climbed up to Rs130 while the greenback remained short in supply.

On Monday, the Pakistan Stock Exchange (PSX) benchmark KSE-100 index lost 605 points to close at 39,666 as the rupee rate fell against US dollar having taken the market off-guard.

On Saturday, State Bank of Pakistan (SBP) Governor Tariq Bajwa had denied any move for devaluation. On the same day, caretaker Finance Minister Shamshad Akhtar had stated that the preparations to approach the International Monetary Fund (IMF) were underway.

The KSE100 Index fell as the currency devaluation “has reignited a concern over the macro situation of Pakistan,” said Faisal Bilwani, head of international sales at Alfalah Securities Pvt. in Karachi.

According to independent economists, while the global backdrop is worsening for many emerging economies, Pakistan’s own weaknesses, including a widening current-account deficit and the lowest foreign reserves in three and a half years, have brought additional pressure on its $305 billion economy, raising the likelihood that the country will seek support from the International Monetary Fund.

“You are not able to stop the foreign exchange bleeding right now,” said Mohammed Ali Hussain, senior analyst at Frontier Investment Management Partners Ltd. in Dubai. “Until and unless you can bolster your reserves, the quick and dirty fix is a devaluation.”

Pakistan’s real reserves have dropped below the level reached when the country approached IMF the last two times for a bailout, according to Bilal Khan, a senior economist at Standard Chartered Bank Plc. With elections scheduled for July 25, the next government will need to approach the IMF as a “matter of urgency,” said Khan.

“It’s a smart move so they can get some extra space’’ before entering negotiations with the IMF, said Mattias Martinsson, a money manager overseeing $420 million of assets at Stockholm-based Tundra Fonder. Pakistan has been getting “a billion or two billion dollars from China from time to time, but what they need is some kind of bazooka to show that they have spare capacity for two years.”

The question is will the bazooka be Chinese (China Bank) or American (IMF).

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