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The Pak rupee plunged around five percent in an intraday trade on Thursday to hit an all-time low of 148/dollar in an apparent devaluation by the central bank as a ‘prior action’ to satisfy the IMF to secure an approval of $6 billion bailout package, analysts said.

By Erum Zaidi & News Desk
May 17, 2019

KARACHI: The rupee plunged around five percent in an intraday trade on Thursday to hit an all-time low of 148/dollar in an apparent devaluation by the central bank as a ‘prior action’ to satisfy the IMF to secure an approval of $6 billion bailout package, analysts said.

The rupee, however, slightly recovered to close the day 3.6 percent weaker at 146.52 in the interbank market. The rupee closed 141.40/dollar on Wednesday.

The stock market once again dived into the red zone as the latest round of rupee depreciation pushed the benchmark index down by over 700 points in intra-day trading. The fresh depreciation prompted renewed stock selling as investors reacted with panic to the latest development. As a result, the KSE-100 index, after a brief upward opening, dropped to an intra-day low of 33,574.85 points.

The benchmark KSE-100 index fell over 650 points in immediate reaction to the rupee’s fall, stockbrokers said. The rupee depreciation would badly impact earnings of companies listed at the Pakistan Stock Exchange.

Investors and traders were baffled whether a sharp drop in the local currency was a clearer and bold devaluation by the central bank to secure the International Monetary Fund’s (IMF) board approval for the $6 billion extended fund facility programme. The central bank attributed the weak rupee to the market dynamics.

“This movement reflects demand and supply conditions in the foreign exchange market,” the chief spokesman of the State Bank of Pakistan (SBP) said in a statement. “It will help in correcting market imbalances,” he said.

Bloomberg reported that the latest devaluation was the most in more than five months. “The currency has plunged more than 20 percent in the past year, making it the worst performer in a basket of 13 currencies in Asia,” it said.

Analysts said the devaluation has added up around Rs667 billion in Pakistan’s external debt, and the forex reserves also dwindled accordingly.

Bankers and brokers were in panic state as Prime Minister Imran Khan in a meeting with the foreign exchange dealers on Wednesday said the rupee should be stable at 143.5-144 in the open market. The rupee lost two percent to close at 147 against the dollar in the open trade, compared with previous close of 144.

Minister of State for Revenue Hammad Azhar told media that the prime minister didn’t peg the rupee-dollar parity at 144. The management of the foreign exchange market is the function of the central bank, he said.

“He (Prime Minister) only asked the law enforcement agencies to take action against the smuggling of foreign currencies to Afghanistan,” Hammad Azhar said, referring to the meeting. Imran Khan in a meeting ordered the authorities to take action against foreign exchange companies selling dollar at higher rates.

Currency dealers said there was no an extraordinary dollars demand from the importers in the interbank market.

“The SBP has surprised the financial markets by today’s (Thursday) move of a sharp depreciation in the exchange rate,” a dealer said, requesting anonymity. “Apparently, the significant weakness in the rupee has appeared a currency devaluation by the central bank as it has withdrawn its support or intervention to slow rupee freefall,” said the dealer.

The dealers said the SBP has implemented a system of free-floating exchange rate as many dealers were making bidding and offering for the dollars on their own.

Zafar Paracha, secretary general of Exchange Companies Association of Pakistan, said a speculation that the government committed to depreciate the rupee by another 15 to 20 percent under the IMF programme affected investor sentiments and heaped more pressure on the currency rupee.

Earlier, rupee was widely believed to be under a managed float. But, the rupee will have market-determined exchange rate as per the IMF, according to Topline Securities.

“(Rupee fall) was highly expected as part of the upcoming IMF programme and is likely the second key prior action,” the brokerage said in a report. “We believe that IMF demands less intervention this time around, as the rate had been aggressively managed during the previous government’s tenure, which made rupee significantly overvalued against dollar. This was also evident from real effective exchange rate index level – measures the PKR fair value against regional currencies – which reached 128 in April 2017.”

The SBP said it has been following a market determined exchange rate regime since 1999.

Meanwhile, Prime Minister's Adviser on Finance Dr Abdul Hafeez Sheikh said the government has agreed on low interest rates for the $6 billion bailout package from the IMF.

The finance adviser was speaking in Karachi alongside Sindh Governor Imran Ismail, Minister for Water Resources Faisal Vawda, Minister for Maritime Affairs Ali Zaidi and Federal Board of Revenue (FBR) Chairman Shabbar Zaidi, Geo News reported.

"On the directions of Prime Minister Imran Khan, his entire economic and financial team arrived in Karachi and met with the prominent businessmen and members of the representative bodies from the city," Imran Ismail told reporters at the press conference.

Hafeez Sheikh said that the country's economic condition was in turmoil when the Pakistan Tehreek-e-Insaf (PTI) government came into power last year.

"When this government took control, the total debt on the country was at Rs31 trillion. In the past two years, foreign exchange reserves have come down from $18 billion to less than $10 billion. The country's trade deficit, the difference between exports and imports, was more than $20 billion annually," said the finance adviser, adding that the country was facing a very tough situation.

Speaking further about the $6 billion IMF bailout, he said the government had agreed on low interest rates for the economic package from the global lender. He said that the World Bank and Asian Development Bank were also expected to provide an additional $2 billion to $3 billion following the IMF package. He said the agreement with the IMF included a few points that would be beneficial for the poorest segment of the country's population.

"It has been decided that the low usage consumers would not be affected if electricity prices ever rise. We have set aside Rs216 billion in budget for this purpose," he said.

The adviser said steps are being taken to come out of crisis.

Parliamentary Leader of the PPP in the Senate Sherry Rehman slammed the government as dollar raised on the street and said that the government is breaking all records of its own failures.

“The US dollar has touched an all-time market rate high touching Rs148 on the ground against the rupee but the government keeps parroting ‘awam ne ghabrana nahi hai’ (people should not worry). A new wave of inflation is about to engulf the country as government enslaves itself without any filter to the IMF. Up next is a 15 per cent hike in power tariff which will affect multiple sectors across the country from the bottom of the economic ladder to once-thriving businesses,” she said.

Sherry Rehman said that to make matters worse, the PTI government has already increased electricity tariff by 33 percent since taking charge. “It is getting very difficult for a common man to survive in these testing times,” she said.

She said the latest spike has caused Pakistan’s foreign debt to increase by Rs666 billion. “Who will be answerable for this? The government has clearly lost the plot, operating without providing predictability for any sector except the banks and currency exchange people,” she said.

The PML-N leader Maryam Nawaz said that people have been getting crushed under the weight of rising prices, increase in bills and shrinking incomes in Naya Pakistan.

The former first daughter in a series of tweets said that she strongly felt for the masses and the misery brought upon them by the ‘fake government’ in the last nine months.

Maryam said that Pakistan has become Asia’s worst performing currency and stock exchange, adding that it was quite a dramatic fall from grace under the tenure for former prime minister Nawaz Sharif when rupee was stable and stock market was among the best performing in the world.

The PTI leader Asad Umar said increase in dollar price is not caused by the agreement which Pakistan and IMF reached recently.

In an informal talk with the media, he said there was no such condition attached to the agreement. He said the issue of rupee's decline will be raised in the Finance Affairs Committee.

Foreign Minister Shah Mehmood Qureshi said it was the job of the State Bank governor to monitor the increase in dollar's price.

He, however, said that the SBP Governor Reza Baqir was a professional man, not political. "He (Baqir) has returned to Pakistan leaving a massive salary and should be given a chance," the minister said.He also said that Shabbar Zaidi, honourary chairman of Federal Board of Revenue (FBR), has never held a government post.