Single-day highest drop against dollar
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.