Rupee free fall continues despite govt assurances of economic stability

• Pakistani rupee hits new low of 226.81 against US dollar.
• Political uncertainty, downgrade in Fitch ratings, IMF delay blamed for fall.
• Finance minister Miftah Ismail says political instability key factor.

KARACHI: The Pakistani rupee on Thursday continued its downward trend against the US dollar, hitting a new low of 226 in the interbank market — despite the government’s assurances of market stability in the coming days.

The rupee fell to as low as 228 during the intraday trade, but it closed at 226.81, losing Rs1.89 or 0.83%, the data released by the State Bank of Pakistan (SBP) showed.

Analysts attribute the fresh depreciation to political uncertainty arising out of the outcome of the Punjab by-elections.

In light of the deteriorating economic situation, Prime Minister Shehbaz Sharif had convened an emergency meeting with the country's economic team and other high-ranking government officials.

The delayed revival of the International Monetary Fund’s (IMF) programme has also played a major part in the rupee's free fall as despite striking a staff-level agreement with the lender, the loan will be disbursed only after the institution’s Executive Board gives its approval — which is expected in August.

Finance Minister Miftah Ismail, however, believes that the economy is on the right track and once political stability returns — which has been uncertain since the coalition government’s take over — the rupee will strengthen against the dollar.

“In terms of real economic fundamentals, we are fine, but political uncertainty screwed us up,” the finance minister told Bloomberg.

Need for ‘active intervention’

Shedding light on the situation, economist and former adviser to federal ministry of finance Dr Khaqan Hassan Najeeb said that Pakistan follows a market-determined exchange rate system.

“In this regime, trade deficit and market influencing news makes a lot of impact on currency changes,” the former adviser to the finance ministry said.

Dr Hassan said that the recent adjustment of the Pakistani rupee is partly influenced by uncertainty due to election results coupled with a Fitch downgrade.

Talking about the increased demand for the greenback in the interbank market, the economist said that banks do not cover LC payments on opening but completely cover them at the time of getting the flows.

“With the pronounced rupee slide, financial institutions tried to cover import payments. It created a higher demand in the interbank,” he explained, adding that when the rupee is depreciating exporters hold their proceeds for a better rate in the future.

Commenting on the intervention of the central bank, he said that the SBP can smoothen the disorderly movement but limited foreign exchange reserves position, as well as bindings of the IMF considerations, constrained SBP.

Development economist Maha Rahman said at this hour, foreign assistance from IMF and our long-term allies and its timeliness is more critical than ever before.

“The [rupee’s] depreciation this week, amongst other factors, has been triggered by the political surprise that the electorate delivered in Punjab on the weekend, and this frenzy should fizzle out soon,” she said.

But Pakistan, she said at this hour, needs active intervention as the overall outlook is fast becoming precarious with fast depleting liquidity.

“I usually also stress upon long-term planning but at this hour adept fire fighting is extremely critical,” Rahman stressed.