ISLAMABAD: The Pakistani rupee weakened sharply against the dollar on Tuesday in what appeared to be currency devaluation by the State Bank of Pakistan (SBP), the second such intervention in less than four months, traders said.

The apparent devaluation comes at a time when Pakistan’s nearly $300 billion economy is showing signs of vulnerability despite surging growth rates.

The rupee plunged to about 115.5 per dollar in early trading from 110.5 at Monday’s close, the traders said.

SBP spokesman Abid Qamar told Reuters the rupee plunge was a “market-driven” event, while foreign exchange traders said the SBP’s withdrawal of support for the rupee in daily market operations sent the currency lower on Tuesday.

Central bank says the currency plunge is a ‘market-driven’ event

The SBP devalued the local currency in a similar manner by about five per cent in December last year amid balance of payment pressures due to a widening current account deficit and dwindling foreign reserves. The market had already been expecting another move for devaluation this year.

“Apparently the central bank withdrew support,” said Fawad Khan, head of research at BMA Capital.

Withdrawal of support would have the effect of devaluing the currency as the SBP is the most influential player in the thinly-traded local foreign exchange market and controls what is widely considered a managed float system.

About the rupee’s decline on Tuesday, the SBP spokesman said it was triggered by “some payment pressures which are building within the market” and added that the central bank would be “observing the market where it is moving towards”.

Vast infrastructure investments by China along with a sharp drop in militant attacks propelled Pakistan’s economic growth to above five per cent, the fastest pace in a decade. But a surge in imports, in part driven by purchases of machinery for the Chinese projects, has widened Pakistan’s current account deficit and prompted analysts to suggest the country may need an International Monetary Fund (IMF) bailout within the next 12 months.

Only this month, the IMF, which had previously provided a bailout package to Pakistan in 2013, had observed that Pakistan’s short-term outlook was “broadly favourable” but also warned that “continued erosion of macroeconomic resilience could put this outlook at risk”.

Looming election

Analysts have been warning the authorities for some time that the currency remains overvalued. “We believe this is much needed as Pakistan’s external account has deteriorated as of late,” said the Topline Securities brokerage in a flash note to clients on Tuesday morning soon after the rupee weakened.

With a general election due in less than five months, analysts say the government will be reluctant to pursue many of the unpopular or politically-damaging measures such as turning to the IMF again, or loosening the currency peg that could further weaken the rupee and usher in higher inflation.

Adviser to Prime Minister on Finance Miftah Ismail had earlier claimed that the country would not need another bailout, citing that exports were on the rise with foreign reserves being well managed.

Capital Economics, a macroeconomic research consultancy, said it expected the government to keep running down its foreign reserves until after the election in order to keep the rupee pegged.

“Once the election is out of the way, however, more drastic action is likely,” Capital Economics said in a research note.

Published in Dawn, March 21st, 2018