Sin­gle-day high­est drop against dol­lar

The Financial Daily - - NATIONAL -

Ru­pee wit­nessed its largest sin­gle-day drop against the dol­lar in over a pe­riod of ten years. Trad­ing in the in­ter­bank mar­ket closed, the ru­pee had dropped by 7.5 per­cent, or Rs9.37, to set­tle at Rs133.67. Sources says that Pak­istan have im­port cover of 1.6 months. The fi­nanc­ing re­quire­ments are $28 bil­lion for this fi­nan­cial year. $8 bil­lion of debt re­pay­ment is also due this year. The State Bank says that a short­age of for­eign ex­change re­serves is com­pelling the govern­ment to take harsh steps. The govern­ment's team is in Bali for pro­gramme talks seek­ing bal­ance-of-pay­ments sup­port from the In­ter­na­tional Mone­tary Fund. The al­ter­ation in the ex­change rate and other pol­icy mea­sures to con­tain im­ports would cor­rect the im­bal­ances in the ex­ter­nal ac­count. Var­i­ous ex­change com­pany out­lets showed that dol­lars were gen­er­ally not avail­able for buy­ers in the open mar­ket while sell­ing was also very low. The sell­ing rate touched as high as Rs140 in the open mar­ket. The Ex­change Com­pa­nies As­so­ci­a­tion of Pak­istan said the clos­ing price of dol­lar was in the range of Rs133.25 to Rs134.50.Most of the cur­rency deal­ers said no­body was sell­ing dol­lars while top ex­change com­pa­nies con­firmed that dol­lar avail­abil­ity was ex­tremely low. Cur­rency deal­ers in dif­fer­ent parts of the city said they only ex­hib­ited sell­ing rates, but truly no sell­ing took place. Trad­ing was less and only small amount of dol­lars were sold. The other op­tions such as as­sis­tance from friendly coun­tries are still there. The funds from Saudi Ara­bia and the UAE are avail­able, but the con­di­tions at­tached were not agree­able that the govern­ment de­cided against avail­ing that op­tion. Pak­istan's cur­rent ac­count deficit has been ris­ing by an av­er­age of $1.35 bil­lion per month. In the last fis­cal year ended June 2018, the cur­rent ac­count deficit was $18 bil­lion. Data re­leased by the SBP shows that its for­eign ex­change re­serves was at $8.4 bil­lion a five-year low.

Pak­istan's to­tal debt and li­a­bil­i­ties have in­creased by Rs900 bil­lion in a sin­gle day and Rs1.4 tril­lion since Aug 18 be­cause of sharp cur­rency de­val­u­a­tion. With Rs3.90 per unit or about 33 per­cent from the ex­ist­ing rate the cost of pro­duc­tion would go up. The govern­ment had de­val­ued af­ter suc­ces­sive meet­ings with the prime min­is­ter. The lat­est ex­change rate would help con­tract im­port bill that stood at $55 bil­lion last year and help con­tain the cur­rent ac­count deficit. The in­creased cost of es­sen­tial im­ports like oil and liq­ue­fied nat­u­ral gas would af­fect in­dus­trial, com­mer­cial and trans­port costs sub­stan­tially.

If IMF bailout talks suc­ceed the ob­jec­tive will be to help Pak­istan reach its full po­ten­tial. IMF's Mau­rice Ob­st­feld ad­vised that in­creased Chi­nese in­volve­ment in Pak­istan's econ­omy could bring both ben­e­fits and risks. Pak­istan is fac­ing fi­nanc­ing dif­fi­cul­ties as it has been hit by a large fis­cal and cur­rent ac­count deficit, a low level of re­serves and a cur­rency. Fi­nance Min­is­ter Asad Umar said on Mon­day the govern­ment would seek to open talks with the IMF in Bali this week for emer­gency fi­nan­cial as­sis­tance. Pak­istan needs more in­fra­struc­ture de­vel­op­ment. It could ben­e­fit from China's role in sup­port­ing its project fi­nanc­ing. But China's in­volve­ment could also bring po­ten­tial risks, he said. Pak­istan has cut the size of the big­gest Chi­nese "Silk Road" project in Pak­istan, a re­con­struc­tion of the main rail line be­tween the port city of Karachi and Pe­shawar in the north­west by $2 bil­lion, cit­ing govern­ment con­cerns about the coun­try's debt lev­els. US Sec­re­tary of State Mike Pom­peo said there was "no ra­tio­nale" for an IMF bailout of Pak­istan that pays off Chi­nese loans to Pak­istan. Chi­nese of­fi­cials have re­jected crit­i­cism that the so-called Chi­naPak­istan Eco­nomic Cor­ri­dor projects have bur­dened Pak­istan with huge debts. The Chi­nese say they have en­cour­aged the coun­try's eco­nomic growth and pro­vided 70,000 jobs.

Im­pact of de­val­u­a­tion would be on im­ports, sig­nif­i­cantly in­creas­ing the cost of in­dus­trial sup­plies and it would be dif­fi­cult for the im­porters to meet their or­ders made be­fore the de­val­u­a­tion. The govern­ment should ap­pre­ci­ate cur­rency by 15 per­cent, re­duce dis­count rate. The ru­pee may fall fur­ther in com­ing months keep­ing in view Pak­istan's for­eign ex­change re­serves. The busi­ness com­mu­nity has ve­he­mently crit­i­cized at the govern­ment over the sharp ru­pee de­pre­ci­a­tion against the US dol­lar, fear­ing it will stoke up in­fla­tion and halt eco­nomic growth by hurt­ing all im­por­tant sec­tors. They were also dis­heart­ened at ris­ing prices of es­sen­tial goods and util­i­ties, which were go­ing to the cost of do­ing busi­ness and hurt the com­mon man. They urged the govern­ment to di­rect the Min­istry of Fi­nance and State Bank of Pak­istan to in­ter­vene im­me­di­ately to ar­rest the ru­pee's slide. Cur­rency de­pre­ci­a­tion for a coun­try like Pak­istan would have neg­a­tive ef­fect to the econ­omy in the long run. IMF sug­gests higher in­ter­est rate, ru­pee de­pre­ci­a­tion. The de­pre­ci­a­tion of the ru­pee will lead to a sub­stan­tial hike in prices, es­pe­cially those of petroleum prod­ucts and im­ported raw ma­te­rial. The govern­ment must en­sure sta­bil­ity in eco­nomic pol­icy and clear its un­cer­tain at­ti­tude on many is­sues, which was se­ri­ously af­fect­ing the coun­try's econ­omy. It is feared the ru­pee may fall fur­ther in com­ing months keep­ing in view Pak­istan's dwin­dling for­eign ex­change re­serves. The busi­ness com­mu­nity has crit­i­cized at the govern­ment over the sharp ru­pee de­pre­ci­a­tion against the US dol­lar, fear­ing it will ac­cel­er­ate in­fla­tion and hin­der eco­nomic growth by hurt­ing all im­por­tant sec­tors. They were also sad­dened at ris­ing prices of es­sen­tial goods and util­i­ties, which were go­ing to en­hance the cost of do­ing busi­ness and hurt the com­mon man. The govern­ment must be­gin con­sul­ta­tion with the stake­hold­ers as the rise in dol­lar's value would spoil trade and eco­nomic ac­tiv­i­ties be­sides hit­ting the com­mon man. The high dol­lar value will lead to an in­crease in im­port cost and hike in petroleum prod­uct prices. It is feared that the ru­pee may fall fur­ther in com­ing months keep­ing in view Pak­istan's dwin­dling for­eign ex­change re­serves.

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