Daily Times

Last year, the Pakistani rupee suffered the greatest devaluation witnessed in the last 10 years. On July 5 2017, the rupee fell 3.1 per cent to 108.1 against the dollar, the lowest level since December 2013, according to the data compiled by Bloomberg. The Karachi-based Topline Securities noted that the move was a ‘long overdue’ devaluation.

However, the plunge did not end there: the rupee touched a record low by depreciating a further 4 percent, on December 11 2017, gradually slipping to 110 against the US dollar in a week’s time.  This volatile behavior of the rupee was followed by the news that the Pakistani Central Bank will allow for a gradual devaluation.

Earlier last year, the IMF (International Monetary Fund) predicted that the Pakistani rupee would be overvalued by about 20 per cent.  Yielding to the economic pressure, built around the speculation of an imperative need of financial support from IMF, the Central Bank to continued to loosen its grip of the currency.

Negating the speculations,Pakistan’s Prime Minister Shahid Khaqan Abbasi denied that the nation would need IMF aid, so soon after completing a $6.6 billion loan program last year that averted a 2013 balance-of-payments crisis.

A statement issued by the Foreign Ministry reinforced the claim by PM, saying they will take all possible measures to makes sure that IMF bailout is not needed.

The Good News

According to the State Bank of Pakistan, a weaker rupee would help the economy grow and ease balance of payments pressures.

The devaluation of the currency will likely to have a positive impact on the exports. This will help Pakistan to uplift the falling exports and boost the deteriorating current account balance, which more than doubled in a year’s time and reached a deficit of 8.9 billion dollar in May last year.

During an IMF staff mission visit to Islamabad, Harald Finger stated that, “Continued exchange rate flexibility will be important to facilitate external adjustments to support exports and economic growth”

Furthermore, Finger said that allowing the currency to slide was a “good starting point” towards achieving growth this year.

The devaluation of the rupee is likely to have a positive impact on Pakistan’s exports. Cheaper exports will boost the deteriorating current account balance

Following the devaluation, the Pakistan received 8.72 per cent greater remittances of about $1.742 billion, in December 2017 compared to the same period last year.

An increase in remittances promotes the stability of the Pakistan’s external sector, by covering almost half the import bill and the deficit in the balance of trade account.

The Concerns

Despite the apparent advantages of depreciation, on exports and remittances, the devaluation may not lead to favourable economic conditions for Pakistan.

Looking back at the similar situation faced by Pakistan in 2007, the devaluation lead to huge new debts and the higher import duties lead to a subsequent decrease in exports.  This is because beneath the artificial impression of luxury items making up a majority portion of imports, a closer look reveals that in reality most of the imports are inelastic goods. Mainly,these consist of intermediate goods, machinery and raw materials such as, petroleum, chemicals and metals. Thus, devaluation would increase their cost, inevitably lead to cost-push inflation and making Pakistani exporters less competitive.

Experts have predicted that the Pakistani Rupee would drop further till it reaches 114 US dollar, before the general elections in August.

However, currently, the Pakistani rupee has seen to be trading at around 110 US dollarsince more than a month, without showing signs of a further decrease. Therefore, if the government and the central bank manage to stabilisethe currency, along with controlling its current account deficit and financial reserves, the future does not look so bleak for the Pakistani Economy.

The writer is an economist, and former lecturer of economics in the UAE. She will shortly pursue a PhD in Economics

Published in Daily Times, February 3^rd 2018.