The matter of currency devaluation has not been sorted out yet – as evident from the fact that the Pakistani rupee hit an all-time low on Friday. The government did its best to claim that this...
The matter of currency devaluation has not been sorted out yet – as evident from the fact that the Pakistani rupee hit an all-time low on Friday. The government did its best to claim that this had nothing to do with commitments to the IMF, but the statements seemed to do little to reassure the market. The IMF demand to deregulate the currency market is well-known – which means that the IMF is not happy with the already significant drop in the value of the Pakistani currency in the last year. The finance ministry spokesperson said that there was no ‘target level’ of exchange rate set by Pakistan’s international partners, and instead the government was focusing on ‘strengthening’ and ‘aligning’ the exchange rate regime. This would mean that the government is weakening its controls over the exchange rate regime – or planning another depreciation. The weakening of the Pakistani rupee continues to create excessive demand for dollars. Currency traders claimed that the State Bank of Pakistan did not intervene as the rupee value fell on Friday, which seemed to confirm fears that the government had let the currency rate fall.
Open market mechanisms could lead to a serious collapse of the value of the Pakistani rupee. Dollars remain short in the currency market, while demand remains high, both for import and debt payments, but also for those looking to secure the value of their money. Pakistan has insisted to the IMF that a free-float exchange mechanism would not work in the country, given the shallowness of the forex market. However, experts expect the rupee to continue to weaken in the next month. With Pakistan’s current account reserves improving slightly to $15.7 billion, the country holds a little more sway in deciding the direction it wants to send the rupee in.
The real question is whether we should expect the same kind of exchange rate volatility that we witnessed last year. The trouble is that Pakistan has appeared ready to do whatever it takes to win the favour of the IMF. With more money incoming from China, one would like the government to show a little more spine. A fake tweet appeared to have increased speculation about exchange rates, but the finance ministry did well to quash the rumours. However, this does little to by way of assurances regarding the government’s decision on the IMF’s conditions on the exchange rate. Currency speculation is set to continue until the IMF bailout is inked.