The rupee slid 3.1 percent against the dollar on Wednesday in an apparent devaluation. Analysts said the State Bank of Pakistan (SBP) had effectively devalued the rupee to its lowest level against the dollar since December 2013, but Finance Minister Ishaq Dar said he felt “deep concern and indignation” at what he called an artificial weakening.
The central bank is the biggest player in the thinly-traded rupee market and traders say it controls what is a managed float system. The rupee tumbled to 108.00/20 per dollar after closing at 104.9 on Tuesday. SBP said Pakistan”s $300 billion economy had shown strong fundamentals but “the deficit in the external account has been rising”.
“Accordingly, the exchange rate adjusted in the market and SBP is of the view that this depreciation …will address the emerging imbalance in the external account and strengthen the growth prospects of the country,” it said in a statement. Following a balance of payments crisis in 2013, improving security and vast infrastructure investment by China have spurred Pakistan”s growth to above 5 percent for the first time in nearly a decade.
But over the past year the current account deficit has ballooned again, and the International Monetary Fund last month said that eroding macroeconomic stability gains could pose risks to the economic outlook.
The IMF had previously said Pakistan”s currency was about 20 percent overvalued but Dar had rejected that, saying in May the figure was no more than 5 percent. Analysts said the devaluation was expected. “We believe the devaluation is in response to ongoing external challenges that have seen FX reserves decline by about $4 billion from their peak of $24.5 billion last October,” an analyst”s note from Citibank said on Wednesday.
Pakistani exporters have long complained that the rupee is overvalued, hurting their competitiveness.
Saad Hashmey, research director at brokerage firm Topline Securities, said historically the rupee had been devalued by about 5 percent per year and the latest devaluation was overdue. “It should help some exports and it should help bring some equity investments as well,” he said. The rupee has traded in a tight range of between 104-105 per dollar since December 2015.
Pakistan”s stock market, which was one of the world”s best performing in 2016, has come under pressure in recent months due to political instability stemming from a corruption probe into Prime Minister Nawaz Sharif.