Pakistan braces for higher inflation as rupee weakens

Analysts say timing of letting currency lose value is questionable

KARACHI: Contrary to the previous two rounds of rupee devaluation, this time the KSE-100 Index underwent a rather subdued ride when the currency weakened against the US dollar.

Analysts say the third round of rupee weakening, which came against expectations and assurances given by the PML-N government, has left investors bewildered at the extent of the plunge, sending them ducking for cover as macroeconomic concerns continue to increase.

On Monday, the State Bank of Pakistan (SBP) allowed the rupee to lose 3.65% in the inter-bank market, in what was the third such development since December 2017.



“Exporters are uncertain whether the current cycle of devaluation would continue further or stop here,” EFG Hermes Pakistan Chief Executive Officer Muzammil Aslam told The Express Tribune.

“Textile (the single largest export segment of Pakistan) exporters are now talking about the rupee weakening to Rs140 to the US dollar. The uncertain situation may result in many exporters holding on to their export proceeds as they wait for further rupee devaluation. If this is true, the devaluation measure would worsen foreign currency reserves,” he said.

“The timing of the devaluation is questionable,” he said.

Exporters were foreseeing devaluation to take place after the next elected government takes charge after the general elections scheduled for July 25, 2018.

With fast-depleting foreign currency reserves, sufficient for less than two months of imports, and a widening current account deficit, Pakistan was expected to take remedial measures. However, many analysts say the measure was meant to be taken by the next government, as the caretaker was only going to make short-term decisions.

With an almost 13% plunge in the rupee in the last six months, the country’s business community feels Pakistan will start feeling the pinch sooner than later.



Aslam said generally, a country’s reserves should be considered satisfactory if they are sufficient for three months’ imports.

Inflation, interest rate hike on cards

The devaluation would play its traditional role of speeding up inflation, making imports much more expensive and convincing the central bank to increasing the key interest rate much earlier and at a faster pace, he said.

This, in turn, would decrease private sector credit and could slow down economic growth.

Imports would remain exorbitant due to Pakistan’s massive reliance on imported petroleum products, which have been becoming costlier every passing day in international markets. Pakistan’s import of petroleum products comes to almost one-fourth of the total import bill.

Devaluation the right approach?

Topline Securities’ analyst Nabeel Khursheed said many are wondering if this is the right approach to tackle the balance of payments situation as the measure has largely failed to boost sluggish exports and slow down expensive imports.

The last two rounds of devaluation had almost no impact on decreasing the import bill, which hit  a record high of $5.8 billion in May. “There was hope that the devaluation would decrease the import bill. However, it has been continuously rising,” he said.



“People are now expecting a further devaluation … the central bank has to increase key interest rate much faster. This would make credit to businesses expensive which may slow down economic growth.”

Published in The Express Tribune, June 13^th, 2018.

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