The fall and fall of rupee


The rupee depreciated for the fourth time in seven months, on Monday. At 128 to a US dollar, the rupee has cumulatively shed more that 21% of its value in the inter-bank market since December 2017.

A further drop cannot be ruled out keeping in view the aggressive measures the caretakers have been taking to tackle the huge challenge of shoring up the fast-depleting forex reserves, which — at $9.47 billion — have tumbled to critical levels of less than two months’ import cover.

The fourth depreciation, of 5%, comes as a surprise to the markets at this point of time, given that the interim government is managing things with its limited mandate to fix the faltering economy. They, however, would digest this quickly considering that the government kick-started the process of seeking a bailout from the IMF to enable the incoming government to move along quicker if it chooses to exercise the option. If the caretakers had not moved to fix the ills of the rupee-dollar equilibrium artificially built by Ishaq Dar to keep the rupee strong, the incoming government would have to take the corrective measure of whether to go back to the IMF or not.

According to the State Bank of Pakistan (SBP), the movement in the rate reflects the demand-supply gap of the foreign exchange. The country’s foreign expenditure — imports and debt repayment — have remained much higher than its income — exports’ proceeds and workers’ remittances. The higher expenditures are being partly financed by the SBP’s foreign currency reserves. The huge imbalance in expenditure and income has pushed the country’s current account deficit to the level, not sustainable beyond the short run.

The depreciation, however, would trigger a fresh wave of inflation in the country. And to deal with this, the SBP has increased benchmark interest rate by 100 basis points to 7.5%. This would, however, make the credit expensive to the private sector and slow down economic growth. The central bank has anticipated the growth at 5.5% as compared to 6.2% that the previous government had set for the ongoing fiscal year.

Published in The Express Tribune, July 18th, 2018.

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The SBP has maintained that the slide in the rupee’s value is due to supply and demand dynamics of foreign exchange

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    Original news : https://tribune.com.pk/story/1760379/6-fall-fall-rupee/