KARACHI/ISLAMABAD: The Pakistani rupee slumped 3.8 percent against thedollar on Monday before slightly recovering in what appeared to be thethird currency devaluation in seven months by the central bank, traderssaid, amid a balance of payments crisis.
The rupee drop threatens to squeeze consumers, coming just days before theEid holiday ending the fasting month of Ramazan and ahead of a generalelection set for July 25.
The apparent devaluation shows signs of vulnerability in the country’snearly $300 billion economy, as dwindling foreign reserves and a wideningcurrent account deficit trigger speculation about going back to theInternational Monetary Fund for loans for the second time since 2013.
One leading economist, Ashfaque Hasan Khan, said the interim governmentthat now holds the reins during the election campaign might itself beforced to go to the IMF.
Khan said the interim government needs to take policy decisions to curbimports and increase exports, but so far the caretaker government has nottaken enough steps.
“If we rely exclusively on the rupee devaluation to address our balance ofpayment crises, this will have disastrous consequences,” he said.
The outgoing government led by the Pakistan Muslim League-Nawaz has toutedits stewardship of the economy as a reason to bring the party back topower, but foreign reserves are now at a low of two months´ worth ofimports.
The PML-N policy for years was to support keeping the rupee relativelystable in what was widely considered a managed float, but as the currentaccount deficit widened and foreign reserves dropped to about half theirpeak, the policy shifted.
Since December, the rupee has fallen by about 14 percent.
The rupee closed at 119.85 per US dollar on Monday after opening at 115.63.Earlier in the day, it traded close to 121 per dollar, traders said.
“On Monday the central bank didn´t intervene (to support the rupee) andallowed the market to determine the rupee value,” Samiullah Tariq, directorof research at Arif Habib Securities, told Reuters.
“Pressure of a high current account deficit and dollar demand in the marketalso contributed to the rupee´s fall.”
A spokesman for the State Bank of Pakistan didn´t respond to Reuters´request for comment on the talk that the bank had withdrawn support for therupee, triggering another devaluation.link>link>
Withdrawal of support would have the effect of devaluing the currency asthe SBP is the most influential player in the thinly traded local foreignexchange market and controls what is widely considered a managed floatsystem.
In December and in March, the rupee was devalued, each time by about 5percent, by the central bank.
Pakistan´s economy is expected to expand by close to 6 percent this year,the fastest pace in more than a decade, but a widening of the currentaccount deficit has brought new worries.
The current account deficit now stands at $14 billion, around 5.3 percentof gross domestic product, an SBP official said.
The economic outlook has been hurt by the fast depletion of foreigncurrency reserves, which now stand at just over $10 billion. Pakistan iscurrently in discussions with China for loans to ease pressure on itsforeign currency reserves.
Over the weekend, the shortage of foreign currency widened the spread atwhich the rupee is traded in the open market and the interbank market to 4rupees.
“Whatever has happened again today is the reflection of growing pressure onthe balance of payments side, Khan told Reuters.
“It also exposes the outgoing government claims that they strengthen theeconomy, that they have always been claiming that they are leaving theeconomy in good shape. That unfortunately isn’t the case.”