Pak Rupee weakens against dollar, govt targets import curbs to ward off currency crisis

Pakistan is running out of foreign currency as exports and remittances from Pakistanis abroad fall while imports rise; the current account deficit has widened to $12.1 billion and estimated external debt has risen to $82.8 billion in June 2017, or 27.2 percent of GDP; ADB warns over economy’s vulnerability.

BE2C2 Report — Pakistan rupee slid against the dollar on Tuesday amid reports that the federal government is seriously considering to impose fresh curbs on luxuries import in effort to avoid devaluing its currency– The current account deficit has widened to $12.1 billion and the share of exports in GDP nearly halved from 13 percent in the fiscal year of 2005-06 to a dismal 7 percent in the last fiscal year.

The central bank has imposed 100% cash margin on the import of certain consumer goods to restrict the demand for US dollars. The rupee has been one of the best performing currencies in Asia for over three years despite the dollar’s sharp appreciation against other currencies.

Pakistan’s currency market has fluctuated regularly in recent months with hefty rises and falls on some occasions. In the long run, however, the rupee has stood firm after experiencing extensive volatility, when it weakened from around Rs98 to a dollar to above Rs103 in the wake of political impasse over alleged election rigging two years back.

However, according to analysts, the artificial support for the rupee has adversely affected Pakistan’s exports.

Shahid Khaqan Abbasi, the prime minister, told the Financial Times that his administration plans to tighten curbs on luxury imports to ward off a foreign currency crisis without devaluing the rupee.

Mr Abbasi said he would rather place further controls on imports in an effort to preserve fast-dwindling foreign reserves than allow the rupee to fall against other currencies.

Some experts told the FT they believe Pakistan will have to request another bailout from the International Monetary Fund within a year.

In March, when the government made it harder to import non-essential items such as vehicles, mobile phones, cigarettes and jewelry by insisting buyers put down 100 per cent of the cash upfront,  the measure drew criticism from the business community that it would encourage people to trade instead on the black market.

The IMF said it had been told by Pakistani officials that the restrictions would be removed within a year but Mr Abbasi told the FT his government was planning to impose more.

“We can put regulatory duties on certain items, especially luxury finished goods, that’s possible,” he said. “We probably will do more of that, yes definitely, to discourage imports.

“Currency devaluation is not on the table, it’s not. A lot of people thought it was . . . [but] it is important to have stability for the rupee,” said Mr Abbasi.

Pakistan is running out of foreign currency as exports and remittances from Pakistanis abroad fall while imports rise.

The central bank had $14.3bn of foreign reserves as of September 15, according to the most recent data — enough to cover exports for about three months. That is down from a high of $18.9bn last October.

According to reports, Pakistan has been importing more than it exports for some time, but the problem has been exacerbated by having to buy Chinese supplies for projects as part of the $62bn China-Pakistan Economic Corridor according to the FT.

While the scheme is aimed at improving Pakistan’s energy supply and transport networks, many economists believe that in the short term it will push Islamabad back towards the IMF– a view rejected by its Finance minster Ishaq Dar.

“We will have to go back to the IMF any time now,” said Muhammad Zubair Khan, a former commerce minister who worked at the IMF for more than a decade. “The current situation is not sustainable,” said Khan to the FT.

Sakib Sherani, a former economic adviser to the government, warned: “From a balance of payments crisis, we will have a full-blown macroeconomic crisis, where private sector sentiment is hit, growth stalls, inflation is high, and the central bank has to act.”

As well as restricting imports, the country has also borrowed money at short notice from various international lenders to pay off its debts. In 2016 and early 2017, Pakistan borrowed $1.2bn from state-backed Chinese banks, report FT.

Many economists according to FT believe the only long-term way out of the crunch is to allow the rupee to fall, encouraging exports and discouraging imports– the International Monetary Fund has repeatedly said that Pakistan’s rupee is overvalued by 5-20%.

But devaluing the rupee has become politically sensitive, with ministers insisting on a strong currency while central bankers warning of the likely consequences.

In July, the rupee suddenly fell 3 per cent, having traded in a narrow band since 2015. Central bank officials said they had backed away from shoring up the currency, but the move drew an angry response from Dar’s ministry, which stepped in to boost its value again before replacing the acting State Bank governor.

Two months after that political skirmish Mr Abbasi said: “The government stepped in to defend the currency . . . [after] the acting governor forced it to drop. That was probably a sign of a lack of experience in the post.”

Meanwhile, the World Bank (WB) has suspended program loans/budgetary support for Pakistan owing to deteriorating macroeconomic indicators; however, the Washington-based lender will continue providing project loans to Islamabad, report local daily The News.

“Last month, the WB team conveyed Pakistani authorities that they cannot provide program loans/budgetary support because of macroeconomic indicators,” sources from the World Bank based in Washington confirmed to The News in capital Islamabad on Sunday.

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