The Pakistani rupee has retraced an all-time low against the US dollar as the American currency soared to 144 rupees, before eventually closing around 139 rupees in the interbank market.
The latest plunge in the value of the rupee comes as Islamabad negotiates a potential International Monetary Fund (IMF) bailout to address its balance of payments crisis.
Finance Ministry officials have said that letting the Pakistani currency sink to its market value is one of the pre-conditions that the IMF team set during bailout talks last month.
Friday’s fall against the US dollar was the second biggest in six weeks and is a warning signal for the cash-starved economy as it cautiously approaches the international lender for a bailout.
The dollar’s value went up by 9.26 rupees in October, and it gained another 9.5 rupees in Friday’s interbank session.
This is the sixth time in less than a year that the rupee’s value has fallen to an all-time low against the dollar.
The freefall began last December when then Finance Minister Ishaq Dar, who had spearheaded the policy to keep the rupee’s value artificially around 100 against the US dollar, was hit by news about corruption cases, which helped reduce the Pakistani currency to around 110 to the dollar.
The second drop came in March this year, when the central bank cut its support, taking the rupee to 115 against the dollar, which was the final decrease in the currency’s value under the Pakistan Muslim League-Nawaz (PML-N) government.
The caretaker government oversaw further devaluation of the currency in June and July, in a bid to address its balance of payment crisis. And the rupee has seen two big falls in October and November, as Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) government looks to address the country’s plunging foreign-exchange reserves.
IMF bailout crucial
Pakistan has $8 billion in foreign exchange reserves, which is not enough to sustain even two months of imports. Analysts say Pakistan stills requires a bailout, despite Saudi Arabia giving $6 billion as part of its diplomatic support for Islamabad.
In addition to Saudi Arabia, Prime Minister Imran Khan has sought economic packages from countries such as China, Malaysia, and the United Arab Emirates (UAE) to plug a $12 billion trade gap and increase its dollar reserves.
Experts have warned Pakistan against its increasing dependency on the US dollar and the government’s frequent usage of already starved foreign reserves to tackle the economic crisis.
International institutions such as the IMF want Pakistan to shift to a free-float regime so market forces determine value of the rupee, as opposed to a managed exchange rate.
In a bid to boost the economy, the PTI government has orchestrated an “austerity drive” which includes reducing state expenditure and auctioning government properties and vehicles to generate additional revenue.
Even so, analysts maintain that the burden on Pakistan’s economy will only be eased through an IMF bailout program.
Finance Minister Asad Umar attributes the rupee depreciation to the “lackluster policies” of the PML-N government. “Devaluation of the rupee is necessary in order to tackle increased foreign loans, decreased foreign-exchange reserves, low exports volume, and an artificial cap on dollar value,” he said.
While Umar says Pakistan is in “no hurry” to get the IMF package, he has hinted at mid-January being the stipulated date for approval of a bailout. Islamabad is also looking to secure funding from the World Bank, the Asian Development Bank, plus private markets.
Government ‘not intervening’
Critics, meanwhile, claim that the new government has left it too late to get the IMF bailout.
“The government has been sitting still and has not done anything to address the economic crises in the country. The rupee’s fall is evidence that Umar has taken too much time to decide how to overcome the balance of payment crisis and the decline in foreign exchange,” Rana Afzal Khan, the former PML-N government’s finance minister, claimed.
He claimed the fall of the rupee reflected public sentiment against the new administration. “The government is still dillydallying and hasn’t revealed a clear-cut strategy or roadmap for the economy, especially with regard to addressing the shortage of dollars,” he said.
“Local industries aren’t happy with this price, they want a lower dollar price. The export-import balance has been significantly damaged for them, owing to the rupee fall.”
Meanwhile, the government economic spokesperson Farrukh Saleem said it was natural that local industries would be concerned with the decrease in the value of the rupee. “When any currency falls, the country’s exporters are happy and importers are sad,” he said, suggesting there could be a further drop coming.
“It is difficult to predict the trajectory for any currency because it is a trade-weighted value. But as things stand, the State Bank isn’t interfering and the [rupee-dollar] rate that you see is determined by the market forces of demand and supply,” he said.
Saleem, however, maintained that the IMF had not asked Pakistan to “devalue” the rupee. “The IMF never asks any country to devalue their currency. They talk about structures and ask you to let the market forces determine the currency value without the intervention of state institutions. That is precisely what IMF has asked of Pakistan as well, which is what has been implemented.”
Chicken and eggs
While discussing the new government’s 100-day performance, which coincided with the rupee fall, the prime minister proposed to alleviate poverty through the local poultry industry, saying that the government would “give rural women chicken and eggs.”
Khan’s “chicken and eggs” solution has come under attack.
But Saleem backs PM’s idea. “Over the past 60-70 years, Pakistan’s exports have largely been dependent on the textile sector. The world has changed, and we’d have to diversify our export base,” he said.
“The world is adapting [to] many new ways to overcome poverty. The [Prime Minister’s] reference to chickens is something that has been implemented in various African countries and has involved global foundations. Chicken farming has been a successful model to reduce poverty around the world.”