The present Pakistani rupee price against the greenback is 115, which increased from 110.5 rupees earlier and this current level the Advisor to the Prime Minister on Finance, Revenue and Economic Affairs Miftah Ismail stated that he and the State Bank of Pakistan (SBP) are comfortable with. Mr Miftah Ismail and Abid Qamar, spokesman for the SBP, maintained that the depreciation of rupee was market-driven.
However, this is being dismissed as the rupee is not a free float or driven solely by market conditions. It is a managed float, which is defined as interventions by SBP to influence the exchange rate through sale or purchase of currencies. The objective of such interventions in the more than 80 managed float countries is to safeguard the economy against shocks associated with widening current account deficit and depleting foreign exchange reserves. The question is what prompted March 20, 2018 depreciation in three months after already 5 percent depreciation in December 2017. The answer is fairly simple. The December depreciation was not enough to arrest the widening trade deficit or the declining foreign exchange reserves.
The SBP’s website shows that July-December 2017 trade imbalance was negative $17.93 billion. In July-February, or in the next two months notably January and February, the balance of trade deteriorated further to negative 24.25 billion dollars. Current devaluation is a good thing and that a pick-up in exports and a slowdown in the rate of growth of imports are positive trends.
Independent analysts continue to cite political concerns in the run-up to a general election as an important factor in the management of the rupee and the economy. The government should be guided by economic reality and not political considerations of small number of advisers.
The issue has become all the more important since the revelations of Army Chief Gen Qamar Bajwa’s comments on the civilian economic stewardship of the country.
The depreciation of the rupee by as much as 4 percent against the dollar is a confirmation of our macroeconomic imbalances that had given instability fears in the face of higher growth rates. The fall has been described as a market-driven measure but there is little doubt it was caused by the central bank’s intervention. This is the second in more than three months. Last December’s rupee depreciation was caused by the widening current account deficit and decline in foreign exchange reserves. Like previously, the State Bank of Pakistan withdrew support for the rupee following the buildup of payment pressures.
For the past several weeks the government had been told that the rupee was overvalued. To set things right and improve the country’s external account, currency depreciation was deemed unavoidable. So the government decided to take the plunge rather than wait another few months by which time the next election would be due.
The new depreciation has occurred; there are market expectations of an increase in the key discount rate by at least 25 basis points to 6.25 percent. The latest depreciation is set also to increase the country’s external debt burden. Pakistan will need to fork out more rupees to service that debt.
Taking the extent the rupee depreciates to Rs118 against US dollar amid economic strains. The rupee depreciated Rs7.5 against the US dollar to Rs118.0 in the inter-bank market compared to its closing rate of Rs110.5. According to a press release issued by the central bank on the PKR-US$ exchange rate in the interbank market closed at PKR 115 per US$ and witnessed an intra-day high and low of PKR 116.25 per US$ and PKR 110.60 per US$, respectively. The rupee closed at Rs117 against the US dollar in the open market.
The country’s external balance of payments position is under pressure due to the large import bill. This has resulted in a widening of current account deficit which has translated into a demand-supply gap of foreign exchange. This adjustment in exchange rate remains broadly aligned with evolving fundamentals on the external front.
The State Bank stated exchange rate movements will continue to reflect the demand-supply conditions in the foreign exchange market. It will continue to closely monitor the foreign exchange markets; and stands ready to intervene to curb the emergence of speculative pressures. There was uncertainty in the currency markets, as banks remained tight-lipped. Trading had been ceased due to massive fluctuation in inter-bank rates.
State Bank of Pakistan spokesman Abid Qamar said it was triggered by “some payment pressures, which are building within the market” and added that the State Bank would be “observing the market where it is moving towards.” This appears to be currency devaluation by SBP, traders said, the second since December last year. Earlier, it was reported the rupee had depreciated to Rs4.5 in inter-bank market to Rs115.0 and follows calls from international lending and credit rating agencies to let the currency devalue to enhance export competitiveness.
In a comment to Pakistan Capital Stake Director Research said “Despite a nearly 5 percent depreciation of the Rupee in December, multiple signals indicated that pressure on the currency would continue. An IMF report released earlier this month also stressed on the need for “greater exchange rate flexibility on a more permanent basis” to preserve external buffers and international competitiveness.
The previous devaluation of around 5 percent did not bring significant impacts on the stock market whereby only $19 million (December 12, 2017 to March 19, 2018) were injected in the stock market by foreign participants as compared to around $460 million outflows from the Pakistan Market since January 2017.
With the current depreciation in the rupee, participants of the stock market would expect the much-awaited increase in foreign buying leading to a positive overall impact. The textiles, power and software are likely beneficiaries while the auto sector might see an adverse hit.
IMF’s post programme report released last week welcomed the central bank’s decision to permit Pakistani rupee to depreciate against the dollar in early-December 2017 but emphasized on the significance of greater exchange rate flexibility on a more permanent basis to enhance competitiveness and safeguard external buffers.
A United Nations report in early-December warned Pakistan’s policy of keeping the rupee stable could become untenable if the US dollar appreciates against other world currencies and possibly erode the country’s foreign exchange reserves.
The recent depreciation would no doubt add a sizeable amount in rupees to markup payable in dollars including multilateral/bilateral loans, Eurobonds and Sukuk which, in turn, would increase the deficit to unsustainable levels.
Inflation would rise not only due to a higher deficit but also due to higher price of petroleum and products and the consequent considerable impact on price of transport and consumer items. The ideal solution would have been to ensure that exporters concerns are addressed while massively reducing heavy reliance on external borrowing and focus instead on reducing expenditure and rationalizing the tax structure to make it more equitable.
A government in its final days and with election is not likely to do so. The governments decide to depreciate the rupee at this time. The fact is that it was a pre-program condition by the multilateral donors, including the IMF.