Fourth Rupee Devaluation In One Year Shows Economic Risk Before July 25 Polls

The devaluation shows signs of vulnerability in Pakistan’s $300 billion economy; widening trade deficit, alarmingly low foreign exchange reserves, hike in oil prices, could further aggravate country’s macroeconomic fundamentals

JUN 12, 2018 — Rupee slumped 3.8 percent against the dollar on Monday before slightly recovering in what appeared to be the fourth currency devaluation in one year by the central bank amid fears of a balance of payments crisis and speculations remittances from overseas Pakistanis may not meet the target.

The State Bank of Pakistan said in a press release, “The market-based adjustment is reflective of the country’s external Balance of Payments position which is under pressure due to a large trade deficit”, echoing many of the concerns being voiced by independent economists throughout the fiscal year.

The decline comes only weeks after the former finance minister assured the country that he did not “see any need for further devaluation” of the rupee.

Stocks reacted sharply to the developments with the KSE-100 index losing almost 788 points in intra-day trading on Tuesday.

The rupee’s slip by Rs4.40 in interbank rate to settle for 119.85 per U.S. dollar threatens to squeeze consumers just days before the Eid holiday, which ends the Islamic fasting month of Ramadan, and ahead of a general election set for July 25. Ironically, for overseas Pakistanis it means better bang for the dollar they send to their near and dear ones — over 9 million Pak expats remitted nearly $20 billion last year when Rupee rate hovered between Rs105 and Rs108 to a dollar with corresponding changes in Saudi Riyal and Dirham.

The apparent devaluation however shows signs of vulnerability in the country’s $300 billion plus economy, as dwindling foreign reserves and a widening current account deficit trigger speculation about going back to the International Monetary Fund for loans for the second time since 2013.

Former finance minister Miftah Ismail in public statements prior to his departure repeatedly assured the country that reserves were sufficient and the uptick in exports due to two rounds of devaluation that saw the rupee lose 13.3pc of its value, would help contain the pressures building up on the external account and pre-empt the need for a further devaluation. Those assurances were dashed on Monday.

Ashfaque Hasan Khan, an economist with the National University of Science and Technology (NUST), said the interim government that now holds the reins during the election campaign might itself be forced to go to the IMF.

Khan said the interim government needs to take policy decisions to curb imports and increase exports, but so far the caretaker government has not taken enough steps.

“If we rely exclusively on the rupee devaluation to address our balance of payment crises, this will have disastrous consequences,” he said.

The outgoing government led by the Pakistan Muslim League-Nawaz has touted its stewardship of the economy as a reason to bring the party back to power, but foreign reserves are now at a low of two months’ worth of imports.

The PML-N policy for years was to keep the rupee relatively stable in what was widely considered a managed float, but as the current account deficit widened and foreign reserves dropped to about half their peak, the policy shifted.

Since December, the rupee has fallen by about 14 percent.

“This is absolutely a failure of policy-makers. They can’t find options to resolve the growing problem of balance of payments; they simply depend on more borrowing to meet the deficits,” said Zafar Piracha, General Secretary of the Exchange Companies Association of Pakistan, told Dawn.

“On Monday the central bank didn’t intervene (to support the rupee) and allowed the market to determine the rupee value,” Samiullah Tariq, director of research at Arif Habib Securities, told Reuters.

Withdrawal of support would have the effect of devaluing the currency as the SBP is the most influential player in the thinly traded local foreign exchange market and controls what is widely considered a managed float system.

In December and in March, the rupee was devalued, each time by about 5 percent, by the central bank.

Pakistan’s economy is expected to expand by close to 6 percent this year, the fastest pace in more than a decade, but a widening of the current account deficit has brought new worries.

The current account deficit now stands at $14 billion, around 5.3 percent of gross domestic product, an SBP official said.

The economic outlook has been hurt by the fast depletion of foreign currency reserves, which now stand at just over $10 billion.

Pakistan is currently in discussions with China for loans to ease pressure on its foreign currency reserves.

Over the weekend, the shortage of foreign currency widened the spread at which the rupee is traded in the open market and the interbank market to 4 rupees.

“Whatever has happened again today is the reflection of growing pressure on the balance of payments side,” Khan told Reuters.

“It also exposes the outgoing government claims that … they are leaving the economy in good shape. That unfortunately isn’t the case.”

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