Pakistani rupee slumped as much as 5.1% on Monday against the US dollar following yet another currency devaluation by the State Bank of Pakistan. It was the third devaluation by the central bank since December last year. The US dollar vs PKR exchange rate was 115.63 when the market opened on Monday. But it soon fell to trade at 121.5 against the dollar. Worse, the US dollar vs PKR rate was Rs 124 in the kerb market on Monday.
US Dollar vs PKR: SBP adjusts the Pakistani currency
Trade pundits told Bloomberg that Pakistan was facing a balance of payments crisis and a worsening economy. The country may soon need financial assistance from the International Monetary Fund (IMF) to bail it out. Notably, the IMF bailed out Pakistan less than five years ago. The State Bank of Pakistan had previously devalued Pakistani rupee in December 2017 and in March 2018, each time by roughly 5%.
The third devaluation by the central bank comes amid a worldwide emerging market sell-off. Countries such as India, Turkey, and Indonesia have already raised their interest rates in response to the sell-off. Argentina responded by securing a $50 billion loan from the IMF to boost investor confidence, noted Bloomberg.
Topline Securities Pakistan analyst Mohammed Sohail told Bloomberg that Pakistan wants to show the IMF that it’s “doing its homework” before seeking financial assistance. Emerging market currencies have come under pressure due to global sell-off. So, Pakistan had to “adjust” the US dollar vs PKR rate as well, added Mohammed Sohail.
Separately, BMA Capital research head Fawad Khan said the State Bank of Pakistan would want to “keep the dollar within the range of 120.” Even prior to this devaluation, PKR was the “worst-performing currency” in Asia against the US dollar since December last year, according to data from Bloomberg.
Risk looms amid weak fundamentals
Economists expressed concerns over the fundamental strength of Pakistani economy as its forex reserves continue to decline and the current-account deficit continues to widen. The foreign repayment obligations are also reaching sky high. According to data from the State Bank of Pakistan, the current-account deficit stands at $14 billion, roughly 5.3% of the country’s GDP. The CAD has widened by nearly 50% in the last three years.
Pakistan’s forex reserves have fallen to about $10 billion, the lowest level in three years. The forex reserves are barely sufficient for two months of imports. A United Nations report had cautioned Pakistan in December that the country should keep the US dollar vs PKR rate stable. That’s because any appreciation in the US dollar against international currencies would deplete the country’s forex reserves.
Pakistan’s economic growth is expected to be 5.2% this year, which would be the first slowdown in six years. The International Monetary Fund (IMF) projects that Pakistan’s external debt will swell further in the next couple of years. The country is currently in talks with China for loans to boost its foreign currency reserves.
The South Asian nation is struggling with the balance of payments even though its imports have declined slightly and exports have gone up. Limited financial inflow coupled with the recent rise in international oil prices has hurt the balance of payments picture, said the State Bank of Pakistan.
Analysts at the Standard Chartered Bank expect Pakistani rupee to decline further against the US dollar. They expect the PKR to fall to 125 by the end of this year.