Pak rupee is coming under increasing pressure in the forex market. It weakened by about 4.4 percent in a single day on 20th March, 2018 to close at Rs 115.4 against the US dollar from Rs 110.5 a day earlier. This follows the fall of 4.7 percent to Rs 110.5 to a dollar in December, 2017. According to Abid Qamar, spokesperson for the State Bank of Pakistan, the rupee plunge was "market driven" as it was triggered by "some payment pressures which are building within the market." The State Bank would be "observing the market where it is moving towards." However, the truth of the matter is that the rupee was greatly overvalued in the market and the latest two depreciations were made to adjust the REER with the nominal rate and economic fundamentals of the economy. Some of the analysts say that Pak rupee was still needed to be adjusted downwards by another Rs 5 (ie, Rs 120 to a dollar) to bring it to the equilibrium level.
The latest depreciation of the rupee was quite in line with the macro-indicators of the economy and was almost overdue. Pakistan's nearly dollar 300 billion economy was showing signs of vulnerability despite surging growth rates. The current account deficit of the country had jumped by 50 percent in the first eight months of FY18, making it more difficult for Pakistan to meet the widening gap in the external sector. The government was desperately looking for an option like Prime Minister's package for exports to reduce the increasing trade deficit that could not be curtailed despite a 5 percent depreciation of local currency in December, 2017. The C/A deficit which was only dollar 2.6 billion in FY16 had risen to dollar 12.2 billion in FY17 and is set to be much higher in FY18 as it had already increased to dollar 10.826 billion during July-February, 2018. The larger C/A deficit was mostly driven by higher trade deficit as home remittances and FDI had shown modest increases. The foreign exchange position was even worse. As per IMF calculations, the net international reserves adjusted for liabilities were minus dollar 724 million in February, 2018 as against plus dollar 7.5 billion in September, 2016 when the Fund programme was concluded. As is normally the case, the IMF may push the country for higher devaluation of the rupee if and when we try to negotiate another programme with the Fund. Another critical factor in downward adjustment of the rupee rate was the likelihood of higher inflation in Pakistan than its trading partners. Pakistan's budget deficit for the current fiscal year is likely to be around 6 percent of the GDP or about 2 percent higher than the target of 3.8 percent. It could be even higher if the gap in revenues and expenditures of the PSEs is to be met through budget allocation and circular debt has to be settled.
Although the rupee slide is largely a reflection of some of the basic indicators of the economy, yet it is bound to have a number of influences on the economy. Prices of most items, particularly of those with high import content, would increase and the general cost of living will go up further, resulting in more hardship for the ordinary people. In a situation like this, some of the central banks may try to inject the available foreign exchange in the market to stabilise the prices. However, it needs to be pointed out that such an ad hoc policy would provide some temporary relief but it is no substitute for bringing about fundamental improvement in the economy needed to stabilise the currency. Anyhow, if exchange rate stability was the target, it must be achieved through measures like fiscal consolidation, growth in exportable surpluses, compression in imports and tightening of monetary policy. The authorities need to concentrate on stabilising and enhancing the competitiveness of the economy or else be prepared for a constant downward trend in the exchange rate. Propping the currency by artificial means would not only be counter-productive but would make matters worse in the long run. Unfortunately, the country has now to pay a greater cost due to the obsession of the former Finance Minister to maintain the value of the rupee at a certain exchange rate.
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