Pakistan Premier Abbasi Says No Plan to Further Weaken Rupee
(Bloomberg) -- Pakistan’s Prime Minister Shahid Khaqan Abbasi said his administration has “no plan” to weaken the rupee further after the central bank started devaluing the currency last week.
Since Dec. 8 the rupee has dropped 4.3 percent to 109.875 per dollar as the State Bank of Pakistan allowed the currency to fall. The retreat makes the rupee the biggest decliner globally in that period, according to data compiled by Bloomberg.
The weaker rupee will have a minimal effect on the economy with an inflationary “impact probably of less than 0.5 percent,’’ Abbasi told Bloomberg in a text message on Friday. He said the “market will decide” the rupee’s level and that the move will help address Pakistan’s deteriorating external position.
With elections looming in August, Pakistan has been hit by political instability and economic stress. The South Asian nation’s current account and trade deficits have widened as exports lag regional peers, while foreign-exchange reserves have dropped to less than half that of Bangladesh. That’s prompted investors, economists and the International Monetary Fund to call for the central bank to scrap its managed float. The rupee was Asia’s most-stable currency since 2014 until the recent weakness.
Pakistan sold $2.5 billion of dollar bonds last month and some analysts believe South Asia’s second-largest economy may need an IMF bailout. Shahid Mahmood, the secretary at the finance ministry, said the government has the option to raise funds by selling more global debt or seeking commercial loans from Chinese banks, instead of going to the IMF to bridge its financing gap.
“We are familiar with procedures so if we have to go to the market we can easily do that within 45 days,” Mahmood said in a phone interview on Friday. The government would potentially raise a smaller amount than November’s sale and will watch the economic situation for two months before taking a decision, he said.
The World Bank estimated in October that $17 billion of external financing -- or 5 percent to 6 percent of gross domestic product -- is needed in the current financial year through June for Pakistan to bridge its debt payments and current account deficit, which more than doubled to $14.4 billion in the year through September. Foreign-currency reserves have slumped 29 percent to $12.9 billion in the year through October.
The IMF has long indicated it believed the currency was overvalued. Harald Finger, the Washington-based lender’s Pakistan mission chief, told reporters in Islamabad on Thursday that the decision to weaken the rupee was “a good starting point’’ in addressing Pakistan’s economic imbalances.
“Certainly it is a difficult period for Pakistan at the moment,” he said. “Success will depend on the strength of policies being put in place, including on exchange rate side efforts to contain the fiscal deficit.’’
A devaluation was initially blocked by Finance Minister Ishaq Dar, who voiced his opposition in July after the central bank allowed the rupee to slide for the first time since 2015. Dar, facing corruption charges and arrest in Pakistan, was granted medical leave in London last month by Abbasi, who has taken over the finance portfolio and also initially ruled out weakening the currency.
The rupee devaluation has already had a ripple effect in the economy with domestic cotton prices rising to highest level this season and steel manufacturers also increasing prices.
In an interview last month, Abbasi said political turmoil is hobbling investor confidence and negatively impacting the country’s economy. Investors have been cautious on Pakistan after the Supreme Court in July barred former Prime Minister Nawaz Sharif from office following a probe into his family finances. Extremist religious protests also choked the capital last month, leading to the resignation of the law minister.
“Things are unlikely to get any easier from here,” Gareth Leather, a senior Asia economist at Capital Economics Ltd. in London, said in a report on Friday.
“Over the next year Pakistan will either be forced to let the currency fall much further, tighten monetary policy aggressively, or make another loan request to the IMF,” he said. “None of these are attractive options, and whichever is taken, growth is likely to slow sharply.”
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