As Pakistani Rupee falls, a balance of payments crisis looms
Pakistan is far behind schedule in its international debt obligations owing to a balance of payment crisis
The Pakistani rupee fell from 115.63 at the start of last week to its lowest value ever of 121.39 against the US dollar by day-end on Thursday, ahead of the Eid holidays.
This is the third fall of the Pakistani currency in the past six months. In December last year, the rupee fell below the 110 mark for the first time in history, with the then finance minister Ishaq Dar engulfed in corruption cases.
Officials close to Dar told Asia times that the former Pakistan prime minister was behind maintaining the rupee’s artificial value around the 100 mark. “He always said 100 is a psychological number, and we should make sure that the rupee doesn’t fall too far below that,” a former aide of Dar told Asia Times. This ensured that the rupee fluctuated around the 100 mark for the most part of Dar’s five-year tenure as finance minister.
The rupee then crossed the 115 mark in March this year after the State Bank of Pakistan (SBP) cut support, bringing the currency closer to its actual value. It was hoped that the move would help increase exports and address Pakistan’s $10 billion current account deficit.
However, with no significant impact on exports over the past three months, the SBP was pushed to address the relentless pressure on the country’s foreign currency reserves. “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,” a statement issued by the central bank read.
Former caretaker finance minister Salman Shah believes there might be more devaluation of the rupee, but says that most of it has taken place.
“The central bank is no longer supporting the rupee and its value reflects the demand and supply situation. So the devaluation will stop once the rupee reaches its true value. And I think most of the pressure has now been released,” he told Asia times.
Shah also believes that the Eid holiday period can actually provide some respite to the local currency. “There is usually an uptick of remittances around Eid. So we’ll have to wait and see,” he said. However, the wider consensus among analysts is that the rupee will drop further.
Most of these predictions cite the hefty imports bill that Pakistan has to pay. Senior financial journalist and analyst at FX Empire Shahab Jafry agrees that the rupee will continue to slump. “Traders had seen it coming, because the central bank is no longer supporting the rupee when there is excess demand for the dollar,” he told Asia Times. “Instead of increasing imports, it inflated the debt payments. The only options for the government is a massive loan or massive investment.”
When asked, government officials confirmed that the imports from China, as part of the economic corridor with Pakistan, form a bulk of the imports bill. Salman Shah suggested that the government needs to better schedule its bills. “Scheduling import bills in the longer-term can help avoid a further slide. The government needs to improve its debt management and extend its maturity structure. And it’s time to make sure that the projects being invested in start giving returns.”
While another bailout appears to be the only way out for the economy, the current caretaker government has ruled out talks with the International Monetary Fund (IMF) for a bailout program. Finance ministry insiders also reveal that Pakistan is “far behind schedule” in its international debt obligations owing to the balance of payment crisis.
Being a former caretaker finance minister himself, Shah conceded that it was difficult for the government to take any long-term measures. “It’s difficult for the caretaker set-up to do much. But yes, they are taking away the artificial support. Maybe they can look for short-term bolstering of reserves by seeking financing from China and improve the CPEC terms and conditions,” he says.
Shahab Jafry says a short-term solution could actually end up helping Pakistan in the long-run. “Whoever gives out the loan will demand austerity, [ask for] more interest rates and will demand that the rupee be moved towards its actual value,” he believes.