Pakistan: Rupee burst

The long awaited devaluation finally hit the Pakistani Currency when the State Bank of Pakistan (SBP) with the collaboration of an International Monetary Fund (IMF) Delegation came up with the decision in December. The Pakistani Rupee fell 3.1% to 108.1 against the dollar, the lowest rate since December 2013. It again went to a depreciation to from 105 to 110 PKR/USD during 9th to 12th December 2017. This leap is as appalling as Mr. Ishaq Dar’s leap to London. This movement towards the intrinsic value of the currency has popped the balloon of his claims of economic strengthening.

In the long term, letting the PKR to mirror currency fundamentals would lessen the burden on foreign exchange reserves of Pakistan. The government is already working on a plan to increase exports and thus normalize the trade balance. In addition to the increase on Import Duty, this move will highly benefit exporters in the short term.

The Pakistan Bureau of Statistics (PBS) states that the country’s total import increased a whopping 19% increase from 24.32 billion USD in the 2nd half of 2016 to 28.94 billion USD during the second half of 2017. Whereas the exports in the July-December 2017 period rose to $6.64 billion, compared to $6.15 in the 2nd half of 2018. Though this also resulted in an inflow of Remittances of about 1.742 Billion USD in December 2017. This stability in the external sector will help cover the import bill and the balance of payments for the Pakistani Government.

The approximately 1.3 million Pakistanis residing in the UAE contributed 8.7 per cent of remittances during the third quarter of 2017. According to the official figures, the UAE and other Gulf countries comprised of over 60 per cent of the country’s $19.3 billion remittances during the last fiscal year. This shows that the inflow is not just dollar based but also tied to other currencies. The foreign exchange market also saw a decrease in Pakistani Rupee’s value against the Euro.

Though the decision to devalue Pakistani Rupee will help the trade balance in the short term, the long term cost Pakistan’s economy will face is that the very exporters who are benefitting from the price hike, will face increased production costs like of machinery and raw materials. SBP will also face hurdles in anchoring inflation at moderate levels. Already it has ended its long held streak of lowest borrowing rates of 5.75% to 6% in January. This aggressive approach by the government shows the serious attempts by Shahid Khaqqan Abbasi to get the country out of a political oriented environment into one that promotes economic growth with focus on industry development.

Yet the question is whether the PKR will continue to the Bear Trend. For that there is unofficial chatter to whether the SBP will try to limit the rate at 112 PKR /USD to prevent speculation.

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