Rupee likely to remain pressurized despite relief

ISLAMABAD: The failure of the Ministry of Finance and the central bank to halt the rapid rupee devaluation has triggered panic in the market that could lead to fast-paced dollarisation of the economy.

The issue warrants timely intervention by the authorities to avoid a rapid rise in inflation.

With an expected increase in petroleum prices, the latest weakness of the rupee would prove to be double jeopardy. The prime minister, who had earlier assumed the charge of finance ministry, faces a hard task to deal with key economic challenges including the twin deficits.

However, the good thing is that the government has finally made two decisions, appointing Miftah Ismail as the adviser and Rana Muhammad Afzal as the Minister of State for Finance. But how would both the gentlemen deal with serious issues like declining foreign currency reserves, rupee devaluation, inflation and external deficits is a million-dollar question.

More and more questions are being raised about the government’s inability to ensure exchange rate stability. There is a growing view that a gradual devaluation is needed to allow increase in exports.

Nobody is expecting that the Real Effective Exchange Rate should be abandoned. It is generally said that the speed with which devaluation is taking place, the rupee may soon reach Rs120-125 against the dollar and that some mechanism has to be urgently evolved with the support of other market players to have the much-needed exchange rate stability.

In fact, all this is happening in line with policies of the IMF that was urging the government to let the rupee fall 23% as the level was being artificially maintained, an advice often politely rejected by former finance minister Ishaq Dar. Those who are aware of the issue maintain that the rupee weakened to a record low when the State Bank of Pakistan (SBP) relaxed its grip on the managed-float currency, which is now further widening the current account deficit besides dealing a blow to the already reduced foreign exchange reserves.

The current account deficit has already widened 89% in first five months of FY18 compared to the corresponding period of 2016-17.

Earlier, the dollar had also slipped to Rs109, but was brought back to Rs104-105 by the finance minister, who then ordered an inquiry into what was said to be a big lapse.

But there is no denying the fact that during the previous devaluation the rupee weakened to Rs105 from Rs98. Later, reports revealed that it was some kind of connivance between central bank officials and those who manage the inter-bank rate to allow such a bigger devaluation that added Rs400 billion to the debt.

Total debt today stands at over Rs25.5 trillion that also includes $85 billion in external debt.

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