Pak Rupee hits 112 to a dollar after ‘managed float system’ withdrawn

Pakistan’s rupee weakened to a record low after the central bank continued to ease its grip on the currency amid mounting economic pressure, widening current account and trade deficits as well as dwindling foreign exchange reserves and speculation that the country may need International Monetary Fund support.

The decision to let the rupee depreciate coincides with ongoing talks with the International Monetary Fund (IMF). According to sources, the IMF had demanded that the rupee should be devalued by at least 16% and its value should be closer to Rs120 to Rs122 a dollar. But Pakistan, for the time being, has agreed to let the rupee fall by about 6%, they added.

In open market, the rupee traded at 111.80/112 on Tuesday. Thus, the dollar has gained Rs7 during the last three days. The rupee has mostly traded in a tight range of 104-105 per dollar since December 2015 as a result of ‘managed float system’. Last week, the central bank decided to let the currency find its equilibrium based on demand and supply,” Mohammad Sohail, chief executive officer at Topline Securities, said.

A currency dealer said it seemed the central bank continued with its policy to allow the adjustments in the exchange rate to help contain balance of payment pressures. Analysts said the rupee was likely to lose value further as it was overvalued by more than 10 per cent, indicating a room for further decline.

“The current price movement shows the unit to extend losses,” another analyst said. “The market is anticipating a new support level of 112 in near-term.” Another analyst said that the rupee was unlikely to consolidate at the 115 level.

Responding to the Rupee slide, the State Bank of Pakistan Governor Tariq Bajwa said the country’s exchange rate was now “closer to the equilibrium”, ironically on a day the currency closed at its record low, but analysts believe that there is still room for further depreciation.

“The current account deficit is a serious challenge and the movement in exchange rate is in response to this challenge,” said Bajwa while speaking at the 33rd annual meeting of the Pakistan Society of Development Economists, report The Express Tribune.

Pakistan’s economy has been stressed by widening deficits and declining foreign-exchange reserves that have fallen to less than half that of Bangladesh. That’s prompted investors, economists and the IMF to call for the central bank to scrap its managed float. The rupee was Asia’s most-stable currency since 2014 until the recent weakness.

“The decision to allow the rupee to ease is a belated response to the deterioration in current account and pressure on foreign reserves,” said Hasnain Malik, the Dubai-based head of equity research at Exotix Capital. “This move should have come earlier, but now is better than delaying it further with more trade and capital restrictions.”

With elections due in August, Pakistan’s Prime Minister Shahid Khaqan Abbasi has denied the nation will need an IMF bailout so soon after completing a $6.6 billion loan program last year that averted a 2013 balance-of-payments crisis. Still, some analysts are speculating that the nation will need financial support as its external position continues to worsen and exports — such as textiles — continue to trail regional peers.

The World Bank estimated in October that $17 billion of external financing — or 5 percent to 6 percent of gross domestic product — is needed in the year through June for Pakistan to bridge its debt payments and current account deficit. Rising imports on the back of China’s $55 billion “Belt and Road” infrastructure push in the South Asian nation have helped fuel the imbalance as the current-account deficit more than doubled to $14.4 billion in the year through September.

Foreign-currency reserves slumped 29 percent to $12.9 billion in the year through October and in an effort to shore up its finances, Pakistan raised $2.5 billion in a dollar-denominated debt sale last month.

According to the central bank data showed on Thursday, Pakistan’s foreign exchange reserves rose to four-month high of $20.986 billion after the government received foreign inflows of the $2.5 billion on account of dollar notes.

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