The rupee continued its fall in the interbank market on Wednesday, with the local currency closing at a historic low of Rs225 against the dollar as Finance Minister Miftah Ismail said political turmoil was to blame for the downturn.
“The panic in the market is primarily due to political turmoil, which will subside in a few days,” Ismail told Reuters, adding that he expected pressure on the rupee to fall in the next few days.
Analysts attributed the decline to the lack of economic guidance amid the political uncertainty prevailing in the country and the State Bank of Pakistan (SBP) not intervening.
According to the SBP, the rupee closed at Rs224.92 against the dollar, down Rs2.93 or 1.3 per cent, from yesterday’s close of Rs221.99.
Political uncertainty hammering rupee
Mettis Global Director Saad bin Naseer said the freefall in the rupee’s value was continuing because the markets were without economic guidance amid the evolving political situation.
“For the market to stabilise, it will require some form of guidance on the political front from the PTI or the ruling coalition with respect to elections.”
He was referring to the PTI’s victory on at least 15 of the 20 Punjab Assembly seats, on which by-polls were held on July 17. Following the win, the PTI has claimed that incumbent Punjab Chief Minister Hamza Shehbaz has no justification to remain in the province’s top office, and at the same time is demanding fresh general elections.
Naseer also pointed out that while the State Bank has listed the domestic and international reasons for the rupee’s decline, the markets are worried about the future of inflows from the International Monetary Fund (IMF), friendly countries and other sources.
Exchange Companies Association of Pakistan General Secretary Zafar Paracha blamed the government and the SBP for not taking measures to stop the rupee’s decline.
“There is an upward trend in the dollar since the market opened today. Yesterday, the SBP stated that it had left the rupee free and the rate was being determined by market forces.
“This system exists in countries where reserves are in the billions of dollars. For a country like ours, where reserves are about $6bn and that too is on loan and we are running after $1bn, this system does not suit us,” he opined.
Paracha said it appeared that depreciating the rupee to 130 or 140 was one of the conditions the government agreed to with the IMF. He cautioned that it would cause a storm of inflation and create a “dangerous” law and order situation.
“When people do not have enough to eat, God knows what will happen. I do not believe conditions would be manageable [if that happens].”
The currency dealer also lashed out at political parties, lamenting what he termed “the lack of governance” in the country. “The government, whether the previous one or the incumbent, has no concern for the people or where the rupee is going. It seems they are all happy about the dollar’s rise because their assets and children are abroad.”
He called on political parties to come together with a single-point agenda — to discuss an economic plan.
He also made a number of recommendations to improve the situation: fixing dollar rates, ending forward cover, imposing restrictions on import of nonessential items, linking imports to exports and expenditures to revenue.
Head of Research at Tresmark Komal Mansoor said the rupee’s freefall followed the downgrading of the country’s outlook from stable to negative by Fitch, Eurobond yields spiking and no active supply from SBP.
“Banks are short in nostros and they have no choice but to buy from the market at a costlier rate,” she added.
‘Trade fundamentals corrected, an ideal scenario’
Later in the day, Ismail said during a press conference in Islamabad that the country’s “trade fundamentals have been corrected” as a result of measures taken by the PML-N-led coalition government.
He said the government had taken steps to reduce imports and saw success on this front to a certain extent in June.
“Non-energy imports reduced 15pc,” he said, adding that energy imports, however, rose rapidly owing to the significant increase in prices internationally in this sector. “And so, these imports increased 120pc last month.”
But, he continued, the government had taken several steps to cut down imports and “we have started to see results.”
He said the country had recorded imports worth $2.61bn till July 18, which indicated that imports would not exceed $5.5bn this month. “So, we will manage to bring down imports by around $2bn as compared to the last month,” he added. The minister further said he was expecting imports to decline further next month.
Citing a lack of foreign currency reserves and other resources, he said the government was trying to balance imports against exports and remittances.
He said this had been achieved to some extent, which meant that the country’s trade fundamentals had been corrected. “The value of our imports will almost be equal to the collective value of our exports and remittances, which is an ideal situation”.
However, he said, the country would still record a meagre current account deficit. “But that is a good thing for a developing country as this indicates foreign investment,” he added.
Ismail said there were “no problems” in the agreement with the IMF. The government had completed all prior actions and would not do anything to create hurdles in the approval of the staff-level agreement by the lender’s executive board, he stressed.
Following the IMF agreement, funding was also available from the World Bank and the Asian Development Bank, he shared.
According to the IMF, $4bn funds would still be needed, for which a friendly country had said it would provide $1.2bn for oil financing, the minister said. He did not name the country but said he expected the deal to be finalised in the next few days.
“I will only say friendly country … there are four to five countries … It will give $100m per month on deferred payment for a year.”
He disclosed that another country would invest $1bn in the Pakistan Stock Exchange, while another country had said it would deposit $2bn.
The minister said the government was considering measures to generate $2-3bn but declined to share details.
The government was also in talks with Russia to import wheat, Ismail shared.
SBP attributes fall to ‘market-determined system’
The rupee appreciated to 204.56 in the first week of July after touching 211.93 on June 22. It kept losing its value against the dollar but registered a minor appreciation when the country reached its staff-level agreement with the IMF on July 15.
It has continued to fall in every session since then.
A day earlier, the SBP attributed the 11-rupee change in the exchange rate in just two days to the “market-determined exchange rate system” under which the current account position, news stories and domestic uncertainty contribute to the daily currency fluctuations.
In an apparent attempt to downplay the depreciation, the SBP said a “better measure” of the rupee’s strength is the real effective exchange rate, which takes into account the currencies in which Pakistan trades in inflation-adjusted terms.
The central bank said the depreciation in the rupee “since December 2021 has only been 3pc”. In nominal terms, however, the local currency has depreciated against the dollar by 18pc over the same period.
The US Federal Reserve has increased interest rates in the recent past to combat inflation, which is hovering at a 40-year high. As a result, international funds are flowing into the US economy to earn better returns. This has led to an increase in demand for dollars, propelling the greenback to a 20-year high against a basket of peers.
Additional input from Reuters.