KARACHI: Only weeks after the former finance minister assured the country that he did not “see any need for further devaluation” of the rupee, the markets proved him wrong. The rupee slipped by 3.8 per cent in the interbank market, or Rs4.40, on Monday to settle at Rs119.8 to a dollar.

The decline began with the open of trade in the morning, and only a few hours later all foreign currency dried up in the open market as well. Several dealers visited by Dawn around noon simply said they have no foreign currency to sell, but were ready to buy dollars at rates between Rs119 and 121, depending on location and time.

At its high point, the dollar touched Rs121.5 in interbank trade. The State Bank of Pakistan did not take calls for comment all day as volatility engulfed the markets and the kerb market all but closed down. In a press release issued after the close of trade the SBP simply said: “[t]his movement is based on foreign exchange demand-supply gap in the interbank market.”

“The market-based adjustment is reflective of the country’s external Balance of Payments position which is under pressure due to a large trade deficit,” the statement continued, echoing many of the concerns being voiced by independent economists throughout the fiscal year. The current account deficit, which measures the difference between inflows and outflows of foreign exchange from the economy, came in at $14 billion for the first ten months of the fiscal year that began in July 2017, a full 50pc higher than for the same period last year.

Slips by Rs4.40 to settle at Rs119.8 to a dollar in interbank market

Former finance minister Miftah Ismail in public statements prior to his departure repeatedly assured the country that reserves were sufficient and the uptick in exports due to two rounds of devaluation that saw the rupee lose 13.3pc of its value, would help contain the pressures building up on the external account and pre-empt the need for a further devaluation. Those assurances were dashed on Monday.

“SBP is of the view that this market-driven adjustment in the exchange rate along with other recent policy measures are expected to contain the imbalances in the external account thereby containing aggregate demand and also facilitate the prospects for generating non-debt creating inflows,” the central bank said, trying to calm jittery markets and traders, while cautioning the government against the dangers of borrowing more to finance the current account deficit for short term comfort.

This was almost exactly the same language used back in December 2017, when the rupee again saw volatility in interbank trading, closing downward by Rs2, though the slide continued for a few days. The only thing missing in that announcement was the caution against resort to further borrowing to bridge the gap. Since then, the government borrowed more than $3.6bn from external creditors.

In March of this year another devaluation saw the rupee slide further to Rs115 in the interbank market, going down further by another couple of rupees in the days following that event. That time the SBP simply said the adjustment “remains broadly aligned with evolving fundamentals on the external front”. This language kept the door open to further exchange rate adjustments, should the “evolving fundamentals” fail to break from their deteriorating trajectory.

The devaluations began last July when a sudden downward slide in rupee in interbank markets hit currency dealers, and later the country, like a bolt out of the blue. It was the first indication that the growing troubles on the external front, best characterised by a growing current account deficit, was becoming unsustainable and the assurances held out by then finance minister Ishaq Dar were straining the market’s credulity. That episode saw an angry Mr Dar sharply rebuke the State Bank, summon the heads of all private banks for an emergency conference and order an inquiry into the event.

Today, the results of that inquiry are long forgotten, but the impact of the growing imbalances in the external account continues delivering periodic jolts to the economy.

“This is absolutely a failure of policy-makers. They can’t find options to resolve the growing problem of balance of payments; they simply depend on more borrowing to meet the deficits,” said Zafar Piracha, General Secretary of the Exchange Companies Association of Pakistan.

Published in Dawn, June 12th, 2018