Inexplicable drop: As rupee dives, finance ministry asks SBP what’s up

Published: September 27, 2011
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Pakistan’s foreign exchange reserves are at record highs, the current account deficit is lower than its usual levels and exports are growing at a rapid clip. Yet the Pakistani rupee seems to be ignoring all of these relevant indicators as it continues its relentless plunge.

Pakistan’s foreign exchange reserves are at record highs, the current account deficit is lower than its usual levels and exports are growing at a rapid clip. Yet the Pakistani rupee seems to be ignoring all of these relevant indicators as it continues its relentless plunge.

ISLAMABAD: 

Pakistan’s foreign exchange reserves are at record highs, the current account deficit is lower than its usual levels and exports are growing at a rapid clip. Yet the Pakistani rupee seems to be ignoring all of these relevant indicators as it continues its relentless plunge. So anomalous is this behaviour that the finance ministry has asked the central bank to investigate the matter.

In a letter written by the finance ministry to the State Bank of Pakistan, the government has asked its top financial regulator to find out if the rupee is being manipulated by the treasuries of the commercial banks in the country. The ministry fears a repeat of a similar scenario in 2004, when the treasuries of three banks were found to be manipulating the currency for their own gains.

Sources familiar with the contents of the letter told The Express Tribune that the central bank has been asked to take measures to curb the drop in the value of the rupee, which fell to an all-time low of Rs89.80 in trading on Karachi’s currency markets on Monday.

The rupee has lost about 5.8% of its value against the dollar since the beginning of the current fiscal year on July 1, according to Tahir Hameed, president of Islamabad Money Changers, about half of which has come in September alone.

“We do not see any reason for rupee depreciation, as the country has sufficient foreign exchange reserves to meet its all international obligations”, said Rana Assad Ameen, the acting finance secretary.

Ameen confirmed that the finance ministry has written a letter to the central bank to investigate the ‘real cause’ behind the rupee’s depreciation.

Finance ministry officials claim that, of the roughly Rs150 billion that had been added to the public debt stock in recent months, none was the result of a dollar-denominated transaction.

Nevertheless, the rupee’s depreciation does cause alarm in the finance ministry which has been struggling to curb both the deficit and the government’s debt. For every extra rupee that it costs to buy a dollar, the government’s dollar-denominated obligations increase in value by Rs55 billion.

Officials from the federal government and the central bank are expected to meet later this week to find a way to arrest the decline in the rupee’s value.

The State Bank’s official exchange rate, despite the precipitous decline on the open market, continues to be a far lower Rs87.62 against the US dollar.

Hameed, the Islamabad-based currency trader, said that many people had stopped selling dollars after the US threatened punitive action against Pakistan in the wake of the attack on the US embassy in Kabul. That shortage, said Hameed, was driving prices higher.

Independent economists, however, have also linked the devaluation with the government’s decision to abandon the International Monetary Fund (IMF) programme after failing to meet the Washington-based lenders conditions caused a suspension in the $11.3 billion bailout.

The government admits that a rupture in ties with the IMF will likely result in the continued blockage of loans from other international lenders.

Yet despite a weak macroeconomic outlook, economists are surprised by the speed and scale of the decline in the value of the rupee.

“Unscrupulous elements have been playing havoc with the exchange rate and they are exploiting the situation at a time when the central bank does not seem in a mood to take action,” said Dr Ashfaque Hasan Khan, a former finance ministry official and the dean of the NUST Business School in Islamabad.

Published in The Express Tribune, September 27th, 2011.

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Reader Comments (9)

  • Sep 27, 2011 - 2:35AM

    The US dollar itself has been gaining steadily since mid-August. Perhaps that accounts for the rise?

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  • H.A. Khan
    Sep 27, 2011 - 6:53AM

    Rupee is loosing value because the economy is hurting,IMF programme has ended, FBR over reporting on tax collection (net,power shortages,lack of FDI,lack of industrilisation ,hyper inflation,flood losses etc.. Pakistan has a huge re-payment of foreign loans comming due and this has also factored into decline in rupee value. In addition, globally (incl Pakistan) a lot of persons had speculated in Gold, gold value crashed and Internationally $ has got stronger. In short,the economy has tanked and will further tank.and people have lost confidence in Pakistan economy and currency.

    Having said the above, Pakistan Rupee will keep on loosing value based on all economic calculations and may reach Rs 93 / $ as per projections of some banks by June 2012.

    The economic team got cold shoulder in Washington and IMF/WB were not receptive.

    The government seriously needs to get the entire macro economic scene in sharp focus and turn the things around.May be change the team as a starter….

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  • Tariq
    Sep 27, 2011 - 9:06AM

    Pakistan will be really surprised when the Rupee is 200 to the dollar, when the US stops all foreignRecommend

  • Hatim
    Sep 27, 2011 - 2:09PM

    This is ridiculous. The Rupee has gained against almost all other major currencies including the AUD, GBP and CAD.

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  • Najmus Saqib
    Sep 27, 2011 - 5:42PM

    The Dollar will go upwards to 92.00 tommorrow, because SBP is not serious in finding the reason.

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  • Meekal Ahmed
    Sep 27, 2011 - 6:19PM

    It does not take a genius to figure out that speculative forces are at work here. The SBP has the dollars which they should sell in the market and force an appreciation. This would cause the speculators to lose billions and it would serve them right.

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  • yo yo maan
    Sep 27, 2011 - 6:33PM

    Dear Paki Hum Watnoooo…it is the flight of capital which is causing the USD spike …wake up and smell the Lipton…

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  • pakeco
    Sep 28, 2011 - 1:40AM

    being an economic expert rupee will be 93 to a dollar by yr end and between 97 and 98 by jun 2012. Do not invest your money anywhere till jun 2012.Recommend

  • Asif Ali
    Sep 28, 2011 - 4:12AM

    If the Finance ministry has made this comment, then the persons responsible for making this comment should be fired. They obviously have no idea what’s happening in the worlds financial market. All currencies have dropped vs dollars, what do they expect would happen woth rupee?

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