FeaturedNationalVOLUME 14 ISSUE # 20

Rupee’s unprecedented slide

The Pakistani rupee fell to record lows in recent weeks after the government agreed to a $6 billion loan from the International Monetary Fund. At a point, the rupee was sold at 149.50 to a US dollar in the interbank market and 150 in the open market and experts fear the rupee’s slide will continue after the government has accepted an IMF condition for a market-based exchange rate mechanism, which would limit intervention by the central bank.


The steep drop has triggered panic in the public and another wave of massive inflation is feared in the country. It also poses a significant political challenge to the government, which has only overburdened the people with price hikes since it came to power last year while its election manifesto was to build a new social welfare system and not to seek loans. Experts say the government will have to raise taxes or impose heavy spending cuts to reduce its ballooning budget deficit at a time when household budgets are increasingly squeezed. Many analysts say the rupee was overvalued and the State Bank of Pakistan has wasted billions of dollars every year defending it in the past, but a weaker currency is likely to fuel inflation, which is already over 8pc, with power and fuel prices hitting especially hard.


Reacting to the rupee’s rapid devaluation, the SBP said, “It reflects demand and supply conditions in the foreign exchange market and would help in correcting market imbalances.” However, SBP’s foreign exchange reserves fell $138 million in the week ending May 10 to $8.846 billion, less than needed to cover three months of imports.


According to noted economist Dr Kaiser Bengali, the government has “very little say” in shaping of the economy and that the rupee could touch 250/dollar within a year. Speaking at a function in Karachi recently, he said, “We currently have a finance minister and governor of State Bank who have come from abroad. Since 1993, we have had these ‘fly-in, fly-out’ consultants.” He accused the government of having minimal say in shaping Pakistan’s economy on the lines of the country’s foreign policy and described the China Pakistan Economic Corridor (CPEC) as a product of the new “East India Company”. “Our political governments don’t have a say in foreign policy, and now they have very little say in the economy. The economy has been taken over by the IMF and the World Bank,” he alleged.


According to the Bloomberg, Pakistan is expected to adopt tough measures as part of its deal with the IMF, which investors speculate may include further currency devaluation. “The IMF program was supposed to bring certainty. Unfortunately until now there is confusion,” Arif Habib, Chief Executive Officer at Arif Habib Corporation, said in a televised program after meeting Finance Adviser Abdul Hafeez Sheikh as part of a business community delegation in Karachi. “We have asked the finance adviser to tell us what is going to happen. People have not been able to anticipate where the rupee and interest rates will stand.”


Pakistan’s benchmark stock index has erased half its market value over the past two years as the deterioration in the economy prompted rating agencies to downgrade the nation. The currency has plunged more than 20pc in the past year, the worst performer in a basket of 13 currencies in Asia. The rupee depreciated by 29pc in May alone. The currencies of Afghanistan, Bangladesh and Nepal are stable in comparison with Pakistan’s. One dollar exchange rate with some Asian countries is: Afghanistan’s Afghanis 79, Indian Rupee 70, Bangladeshi Takka 84, Nepalese Rupee 112, Bhutanese Ngultrum 69, Thai Baht 32. Beyond the region, a US dollar exchanges with South Africa’s Rand 14.45.


The only good news on the economic front is that Pakistan’s trade deficit has shrunk by 13.1pc to nearly $26.17b in the first 10 months of the fiscal year, from $30.114b in corresponding period last year, indicating that government’s corrective measures against trade deficit are bearing fruits. The decline in deficit — decreasing by $3.944b during July-April — is estimated to be around $5-6b by the end of FY19. The contraction is mainly attributable to a steep fall in the overall import bill even though export proceeds posted a mixed trend during the period.


Experts say the State Bank of Pakistan has withdrawn its silent support to the exchange rate and let the rupee find its own value. The steep drop of 3.6pc in the rupee value in a single day came a day after Prime Minister Imran Khan had held a meeting in Islamabad with a delegation of the Exchange Companies Association of Pakistan, asking them for ways to build foreign exchange supplies in the country to help reign in volatility.


Analysts say the situation in Pakistan is being exploited by hoarders and profiteers to make quick bucks overnight. Money laundering is also being considered a big reason behind the steep rise in the dollar value. The government has set up a committee to control the devaluation of the local currency and the flight of capital from the country. A crackdown on hoarders and money launderers is necessary to stabilize the value of the rupee. The government should also ban the import of items which are produced in the country. It is estimated to reduce the country’s import bill by $5 billion a year. In yet another measure that can translate into a saving of valuable foreign exchange, the maximum $10,000 limit for Pakistanis travelling abroad can be brought down. A cut to $3,000, for instance, would help the government save $2 billion a year.


According to a US State Department report, over $10b is smuggled out of Pakistan every year. Pakistan will have to take effective measures to check the flight of capital from the country. The government will have to act fast, to save the country, people and itself from serious fallouts of the steep decline of the rupee.