The Pakistani rupee is at an all-time low after officials at the country’s central bank triggered a devaluation of the currency last week – the second in little over a quarter – leaving the rupee at 115.5 against the US dollar.
The plunge signified a 4.4% fall on March 20, from Rs 110.5 the day before, after the currency dropped by 4.7% in December last year.
State Bank of Pakistan spokesperson Abid Qamar confirmed that the move was necessitated by “some payment pressures which are building within the market.” A central bank statement maintains that it now plans to let “market-driven adjustment in the exchange rate to continue to contain the imbalance in the external account and sustain a higher growth trajectory”.
However, Miftah Ismail, the adviser to the prime minister on finance, revenue and economic affairs, has said that the value of the rupee would not “be allowed to go below 115 rupees”.
“We have halted it at Rs 115, which is where the market will settle in a day or two,” he said during a TV interview. “Although the money exchangers are carrying quite a big gap, the market will settle at Rs 115.”
Moody’s Investor Service said in July last year that the Pakistani rupee was 20% overvalued and urged the State Bank to stop keeping the currency at an artificial level. Government officials maintain that the plunge in the value of the rupee will actually benefit the current account deficit, by helping increase exports now that the rupee is approaching a truer value.
“Considering the step has been taken with the general elections just a few months away, it is obviously in the larger interests of the country,” a Finance Ministry official said to Asia Times. “Once exports increase, the burden on the imports bill will reduce and pressure on the currency will decrease.”
However, as the government sells devaluation as a long-term strategy, and the central bank cites market pressures, traders and financial analysts aren’t buying these claims.
Sources within the central bank have told Asia Times that the absence of ‘foreign grants’ has also undermined the rupee. “The currency has been overvalued for a while, payment pressures do not build up all of a sudden. This pressure has been mounting for months, but the state hasn’t been able to get one of our usual friends at the international arena to buy out our troubles,” one source revealed.
Shahab Jafry, a former Middle East Correspondent for Pakistan Today and analyst at FX Empire, said a key factor has been a drop in Saudi grants, which has reduced the central bank’s reserves and capacity to intervene in the market.
“Our current account deficit is such that we only have two months of import cover left,” Jafry said while talking to Asia Times. “How do you intervene? You intervene by flooding the market with money. When the dollar demand is high, you intervene by putting dollars in the market. But with only two months of import cover left, such intervention would mean a drop down to [just] two weeks of cover.”
Current account deficit of $10 billion
Former caretaker finance minister Salman Shah agrees that lack of foreign support has aggravated Pakistan’s currency crisis, which has resulted in a current account deficit of $10 billion.
“If you have a large trade deficit, which translates into a large current account deficit, there are two ways to finance it: foreign investments, and loans from international capital markets or donors. If this isn’t available, then the rupee is under immense pressure,” he said to Asia Times. “Since Miftah saab has said that we won’t be going into the capital market, the other option the SBP has to perhaps buy out dollars from overseas Pakistanis. And of course, bilateral engagements could help the reserves as well – the likeliest being Chinese support.”
Saudis, China not prepared to help
Last month the Financial Action Task Force (FATF) agreed to put Pakistan on its grey-list, for insufficient action to prevent funding of terrorism, which could spark international banking isolation for the country, if it is blacklisted.
The FATF grey-listing will only be formalized in June and is yet to directly impact on bilateral agreements, but government officials concede that it could be a stumbling block in the future.
“Considering that Saudi Arabia and China backed out from supporting Pakistan at the FATF meeting in Paris shows that they do not feel it is in their interest to deal with Pakistan, diplomatically or financially,” Lieutenant General Talat Masood, a former secretary of Pakistan’s Ministry of Defense Production, told Asia Times.
And while the Pakistani rupee sunk to all-time depths, Venezuelan President Nicolas Maduro has knocked three zeroes off the Bolivar currency, as the state’s economic crisis continues.
Discussing Venezuela’s case, Salman Shah maintained that while there are absolutely no parallels, Pakistan would have to address its depleting reserves, to ensure the rupee doesn’t undergo a similar free fall.
“It depends on the current account deficit and if it deteriorates. As things stand it can be financed through loans by the World Bank or other countries. But if there is no borrowing window and reserves continue to decline, things could get worse obviously,” he said.