Home / This Week / Cover Stories / Rupee depreciation: What right or wrong?

Rupee depreciation: What right or wrong?

Federal Minister for Finance, Ishaq Dar seems not in a pleasant mood after the local currency plunged against the dollar, for the second time since his term. There is sharp depreciation of the rupee. The Finance Minister described the move as ‘artificial’ by the State Bank of Pakistan (SBP) and later added that it was the result of “miscommunication between a few individuals. Now the country’s external accounts have widened to unsustainable levels, and depreciation in the rupee is unavoidable. The correction in the data reported for the current account showed that the deficit is in fact $1.71 billion higher than what it has been reported all year.

The situation is even more urgent than originally thought. The clear fact here is that after the Finance Minister’s anger, all appearance of the independence of the State Bank of Pakistan (SBP) has almost completely faded.

Crack emerged between the SBP and the Finance Minister, Ishaq Dar. Dar summons Bank’s heads to Islamabad. Last week The rupee plunged by 3.1 percent in the opening hours of interbank trade on Wednesday, causing a shortage of foreign currency in the open market as dealers preferred to hold rather than sell. By midday the dollar had risen to Rs108.50 before settling at Rs108.25 by close.

This is the largest single drop in the currency in nine years. The State Bank of Pakistan (SBP) held its silence during the day. But hours after the close of trade, the central bank issued a statement owning the move, saying it had become necessary due to a growing deficit in the external account.

The move drew a sharp reaction from the Finance Ministry where an emergency meeting was called in the afternoon. A strongly worded statement issued after that meeting called the decline “artificial” and said it had “negatively affected our foreign exchange markets”.

The Finance Minister expressed deep concern and disappointment at the artificial depreciation move. It seemed for him that the current political situation is being exploited by certain individuals, banks and entities.

This is the first open split between the SBP and Finance Minister who has been dominating the bank’s affairs for the last four years. It may be noted that rupee is still substantially overvalued than its fair value.

There have been calls from exporters and others, including the commerce minister, to revise the currency rate in line with similar adjustments made by China and Turkey.

State Bank of Pakistan has claimed that the depreciation would actually strengthen the country’s growth prospects and would address the emerging imbalance in the external account.

For some time now exporters have argued in favour of lowering the value of the rupee, saying this would strengthen their overall competitiveness. In the same vein the International Monetary Fund said last year that the rupee was overvalued by up to 20 per cent.

The rupee had been stable for nearly two years. Supporting the rupee depreciation, the central bank said in a statement “SBP also believes that the current exchange rate is broadly aligned with the economic fundamentals.” It added that depreciation in the exchange rate would address the emerging imbalance in the external account and strengthen the growth prospects of the country.

The Finance Minister Ishaq Dar said foreign exchange reserves currently stand at $21 billion. Of these, $16 billion are with the central bank and the remaining five billion with the private banks. Dar said that Pakistan’s foreign loan and liabilities would have been enhanced by Rs230 billion if the dollar value remained at Rs108.

The rupee depreciation also increases inflation rate, besides soaring the public debt payment. However, most of the analysts said that SBP took right decision by depreciating rupee value, and emphasized that that government should not intervene in the market situation.

The Federation of Pakistan Chamber of Commerce and Industry (FPCCI) voiced concern over the sudden erosion in the exchange rate, terming it against the national interests and unacceptable.

Although Dar was highly critical of the situation a day ago, he now seemed to have accepted two per cent devaluation instead of 3.1 percent. Currency dealers said the interbank market started at Rs108.30, but soon the dollar started falling against the rupee and dropped to Rs105.50 around midday. Public buying was nominal across the country which kept the market calm for the whole day.

Check Also

Expanding digital economy is not a threat to workforce of today

Expanding digital economy is not a threat to workforce of today

It is the general belief that fast advancement in technology is adversely impacting employment level …

Leave a Reply