Rupee sinks 3.2% against US dollar, Dar and SBP divided over explanation

Finance minister terms plunge as manipulation, central bank says market has adjusted

ISLAMABAD: The Pakistani rupee sank to its three-and-a-half-year low on Wednesday, trading at 108.25 to the US dollar, as concerns over foreign exchange reserves and political stability took their toll on the currency.

However, the rupee depreciation was all the more dramatic as it exposed policy differences between the Ministry of Finance and the country's central bank.

While Finance Minister Ishaq Dar, a known advocate of keeping the rupee-dollar rate stable, termed the depreciation in the interbank as an act of "exploitation" by individuals and entities, the State Bank of Pakistan (SBP) sounded optimistic and said the "depreciation in exchange rate will address the emerging imbalances in the external account".

The rupee fell to 108.25 to the greenback in interbank trading - a depreciation of Rs3.35 or 3.2% in a single day, raising alarm bells in the finance ministry.

The depreciation was steeper in the open market, as the rupee fell to 109.40, according to currency exchange dealers. However, according to reports, there was a halt in selling dollar notes in the open market, as hope increased of even better returns.

"The deficit in the external account has been rising for some time and accordingly, the exchange rate adjusted in the market," said the central bank in an official handout while exerting its independence. The SBP is of the view that this depreciation will address the emerging imbalances in the external account, it added.



"The exchange rate in the interbank market has depreciated by 3.1% from Rs104.90 per US$ to Rs108.25," said the SBP.

However, Dar immediately blamed the current political situation behind the steep decline in the value of rupee. He also called a meeting of banks’ officials on Thursday.

"Certain individuals, banks and entities" are exploiting the current political situation.

He did not mention a weakening external account that is said to be the main reason behind the fall of rupee.

Dar chairs meeting

Dar chaired an emergency meeting of the officials of Finance Division and "expressed deep concern, indignation and disappointment at the fact that the current political situation is being exploited by certain individuals, banks and entities", according to a handout issued by the finance ministry.

Dar vowed that the responsible persons and entities in this matter would be identified and appropriate action will be taken against them.

At a time when the country's external account is under extreme stress, there is no permanent governor at the SBP for over two months. The bank's affairs are being run on an ad-hoc basis.

What happened before the decline

For the past three and a half years, the rupee-dollar exchange rate parity broadly remained stable. Nevertheless, the International Monetary Fund (IMF), independent economists and the exporters have long been calling the finance minister to let the rupee gain its real value, estimated at over Rs116 to a dollar.

The rupee shed the value hardly three weeks after the IMF Directors called on Pakistan to allow for greater exchange rate flexibility - rather than relying on administrative measures - to help reduce external imbalances and bolster external buffers. The IMF handout issued in mid-June noted that Pakistan's foreign exchange reserves have declined in the context of a stable rupee/dollar exchange rate, implying that the government was throwing dollars to defend the rupee.

It had added that macroeconomic stability gains made under the 2013-16 EFF-supported programme have begun to erode and could pose risks to the economic outlook.



Pakistan's current account deficit has already touched $9 billion during July-May period of the last fiscal year. In eleven months, the deficit was double than the official projection after the country's exports nosedived and the growth in remittances also started reversing.

Pakistan's economy started weakening immediately after the end of $6.2 billion IMF programme in September last year. Signs had started surfacing two years ago.

The current external sector situation suggests that Pakistan will soon go back to the IMF, although Dar said in May that the country would not require another bailout programme for years to come.

The official foreign currency reserves held by SBP stood at $16.376 billion as of June 23 including $3.9 billion short-term borrowings. The net official foreign currency reserves of the central bank are in the range of $11 billion, which are sufficient to finance slightly over two months import bill.

Foreign exchange reserves are a barometer of the country's external payment capacity. Adequate reserves give a sense of confidence to those engaged in the business of import and export.



Who will benefit

The strong dollar may benefit nose diving exports. However, due to one-sided Free Trade Agreements signed with China, Malaysia and Sri Lanka, Pakistani exporters are not in a position to take any major benefit from weakening rupee. The narrow base of exports and high cost of doing business are the other main reasons.

One rupee reduction in the value against the US dollar would notionally add Rs78 billion into Pakistan's total external debt and liabilities. The country's total external debt and liabilities stood at $78 billion and four rupee depreciation would mean Pakistan will require extra Rs312 billion to service the same amount of debt.

The depreciation will fuel inflation and will have a direct bearing on prices of electricity and petroleum products.