KARACHI: Pakistan’s currency on Tuesday slid 1.04 percent or 3 rupees to 291.51 to the dollar, making it Asia’s worst performer.
The currency has fallen after Anwaar-ul-Haq Kakar, a relatively unknown politician, was sworn in as Pakistan’s caretaker prime minister to supervise national elections amidst political and economic challenges.
Traders said that the rupee crossed the 300/dollar mark in the open market. However, according to official rates of the Exchange Companies Association of Pakistan (ECAP), the local currency declined by 1.35 percent, or 4 rupees, against the US dollar. The rupee was trading at 300 to the dollar according to the prices issued by the ECAP, down from 296 on Friday.
Traders were concerned about the possibility of further depreciation under the interim administration. According to analysts, the caretaker setup has assumed control of the economy, and it would not intervene too much in the currency market. The timing of elections is another area of significant uncertainty. The market is also keeping an eye on how the International Monetary Fund’s decisions would be implemented by the caretaker government. These actions would drive up inflation even more.
The main problem is economic stabilisation as Pakistan’s economy is recovering at a slow pace following an ongoing $3 billion IMF bailout that prevented a sovereign debt default. Economic reforms have already driven interest rates and inflation to record highs. “Today’s price movement in the USD/PKR was likely due to speculation around the appointment of the caretaker finance minister as the decision would be pivotal in the pace of devaluation of the rupee,” said Komal Mansoor, the head of research at Tresmark. “Emerging markets are turbulent; the rouble and Argentina peso have devalued significantly, and we may see ripple effects in the USD/PKR,” Mansoor added.
The falling price of the rupee in the interbank market was also brought on by a drop in the value of the currency in the open market, a rise in demand for foreign currency amid a relaxation of import restrictions with dried foreign currency inflows, and a generally stronger US dollar relative to major currencies.
“Since the IMF put a condition around the gap between the open market and interbank rate to not more than 1.25 percent for any 5 consecutive business days, the interbank has come under pressure as the open market was on the higher side,” said Fahad Rauf, the head of research at Ismail Iqbal Securities. “Moreover, IMF wants the rate to be market-determined, meaning not much restriction on trade. Adhering to this, the SBP has relaxed some conditions on imports, which is also resulting in higher import payments, and pressure on PKR,” Rauf noted.
The ECAP’s general secretary, Zafar Paracha, stated that the increasing difference between interbank and open market exchange rates breaches an IMF requirement for the current loan programme. “People’s perceptions of the caretaker government’s economic choices are explained by the depreciation of the currency. Because the caretaker government is impartial and has no political allegiance, it can easily introduce a mini-budget, devalue the currency, and raise fuel prices,” Paracha said. Remittances and exports, he claimed, are also falling. The grey market is becoming the destination for remittances. Grey channels providing greater rates play a role, he added.
The first month of the current fiscal year saw a 19.3 percent year-on-year decline in remittances from Pakistani citizens working overseas, totalling $2 billion. These inflows decreased by 7.3 percent on a month-on-month basis. The country’s forex reserves held by the State Bank of Pakistan fell by $110 million to stand at $8.04 billion as of August 4.
The Korean currency, which has also been among the worst performers after the rupee in the emerging markets, fell by 0.8 percent day-on-day on August 15. Against the dollar, Chinese currency decreased by 0.7 percent, according to data based on MSCI Asia Emerging and Frontier Markets Index compiled by Topline Research.
The Pakistani rupee has been the region’s worst-performing currency so far this year, slumping 22 percent. This compares with a fall of 5.6 percent in the South Korean won, 5.4 percent in the Chinese yuan, and 5.4 percent in the Bangladeshi taka.
