Pakistan Lets Rupee Devalue as Finances Wobble Before Election

(Bloomberg) -- Pakistan’s central bank devalued the rupee for the fourth time since December, seeking to slow the depletion of its foreign-exchange reserves before a national election in nine days.

The currency, whose rate is set by the central bank, dropped as much as 5.3 percent to 128 per dollar at the close, according to a statement released by State Bank of Pakistan. The rupee is the worst performer in Asia this year, according to a basket of 13 currencies compiled by Bloomberg. The movement in the exchange rates reflects the demand-supply gap of the foreign exchange in the interbank market, the central bank said in a statement.

While the global backdrop is worsening for many emerging economies, Pakistan’s own weaknesses, including a widening current-account deficit and the lowest foreign reserves in three and a half years, have brought additional pressure on the $305 billion economy, raising the likelihood that the country will seek support from the International Monetary Fund. The sell-off in emerging market currencies and stocks is likely to continue in the second half of 2018 as the U.S. raises interest rates and the world braces for a trade war, according to a Bloomberg survey published last week.

The Pakistani rupee has dropped almost 14 percent this year, followed by the Indian rupee’s 6.9 percent loss. That still pales next to the Argentine peso’s 32 percent depreciation, a rout that led the IMF to approved a $50 billion loan for the country last month, the biggest in the fund’s history, and the Turkish lira’s 22 percent retreat.

The benchmark KSE100 Index fell 1.5 percent as the currency devaluation “has reignited a concern over the macro situation of Pakistan,” said Faisal Bilwani, head of international sales at Alfalah Securities Pvt. in Karachi.

“You are not able to stop the foreign exchange bleeding right now,” said Mohammed Ali Hussain, senior analyst at in Dubai at Frontier Investment Management Partners Ltd., which handles $2 billion in assets. “Until and unless you can bolster your reserves, the quick and dirty fix is a devaluation.”

Pakistan’s economic growth may slow this year for the first time in six years, dropping to 5.2 percent, with an expected scaling down of expenses, according to a Bloomberg survey. The nation’s economy in the last fiscal year grew at the fastest pace in more than a decade, with China financing of about $60 billion in infrastructure projects.

The devaluation follows a 100 basis-point rate increase Saturday, the most since 2008, as the central bank attempts to suppress demand. The economy is “overheating,” State Bank of Pakistan Governor Tariq Bajwa said in a briefing. There needs to be a balance “between stabilization and growth.”

Pakistan’s real reserves have dropped below the level reached when the country approached IMF the last two times for a bailout, according to Bilal Khan, a senior economist at Standard Chartered Bank Plc. With elections scheduled for July 25, the next government will need to approach the IMF as a “matter of urgency,” said Khan.

“It’s a smart move so they can get some extra space’’ before entering negotiations with the IMF, said Mattias Martinsson, a money manager overseeing $420 million of assets at Stockholm-based Tundra Fonder. Pakistan has been getting “a billion or two billion dollars from China from time to time, but what they need is some kind of bazooka to show that they have spare capacity for two years.’’

--With assistance from Chris Kay.

To contact the reporter on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net

To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, Chris Kay

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