ISLAMABAD   -   Pakistani currency dropped to another an all-time low on Wednesday as dollar value spiked to over 162 rupees in the interbank market, while the greenback was being traded at Rs163 in the open market.

The rupee had closed at Rs156.98 against the dollar in the interbank market on Tuesday and it jumped by over Rs5 in a single day on Wednesday.

The State Bank of Pakistan (SBP), which had recently said it was keeping a watch on the market and may intervene if need be, once again chose not to take any action.

The US dollar has been on a consistent upward trajectory during the past two months, since Pakistan signed a staff level agreement with the International Monetary Fund (IMF) on May 12 when the dollar value was around Rs140.

The federal government, which has promised the IMF not to intervene in the market, had earlier justified its inaction over the rupee value depreciation by saying that it was a result of the value manipulation by the past government.

Both the finance ministry and the SBP had said that the value of dollar would stabilise once it reaches the equilibrium, which, according to former finance minister Asad Umar, was expected to be reached when the dollar value reaches around 157.

After the dollar continued it rise beyond that projected equilibrium mark, the pressure increased on the government and the SBP to do something to salvage rupee.

Last week, SBP Governor Reza Baqir therefore gave assurance that the central bank would intervene in the market in case of excess volatility.

Some news report had suggested that Pakistan had agreed with the IMF to take the greenback to Rs171 by June next year, though authorities have been denying agreeing to any fixed value of dollar with the international lender.

Certain market sources claimed before The Nation that Pakistan had assured the IMF to take the dollar value to Rs165 before the IMF executive board meeting, which would meet on July 3, 2019 to give final approval to the $6 billion bailout programme.

An SBP official informed this paper that rupee was particularly under pressure due to the foreign debt repayments that are due before the outgoing fiscal year which closes on June 30, 2019.

Also, the government is to pay against oil import bill in next few days.

Another reason behind massive currency depreciation is continuous decline in country’s foreign exchange reserves.

According to SBP data, the central bank’s foreign exchange reserves as of June 14 stood at $7.6 billion, equivalent to less than one and half month of import payments.

 Impact of currency depreciation

Pakistan’s loan has increased by Rs525 billion in just one day due to the rupee depreciation. In last ten months of the current fiscal year, the rupee depreciation added Rs1,221 billion in debt, which took the government’s borrowing to Rs2,824 billion.

Pakistan’s overall public debt and liabilities are rapidly increasing as it touched Rs35.09 trillion by end-March 2019. According to the Economic Survey, during first nine month of current fiscal year, External Debt and Liabilities (EDL) recorded an increase of $10.6 billion to stand at $105.8 billion at end of March out of which public debt was $74.2 billion.

The rupee depreciation is also fuelling the inflation rate in the country. The inflation rate was recorded at 9.1 percent in May due to the continuous rupee devaluation and increase in energy costs. And, inflation would continue to increase in the months to come due to the economic policies of the incumbent government.

According to the government’s estimates, the average inflation is expected to be 8.5 percent in the next fiscal year (2019-20) that may touch 10 percent by fiscal year 2020-21.

 SBP’s hollow assurance

State Bank Governor Dr Reza Baqir in his last week’s presser had said that the recent depreciation in rupee was “seasonal.”

He explained that the government had adopted a market-based exchange rate instead of a free float or fixed exchange rate, as neither were appropriate at this time.

“In the market-based system, you consider supply and demand factors, what side they are pulling the exchange rate, and you don’t suppress them. And this is fundamental ─ we keep a close eye on the market, and if there is excessive volatility [...] or special pressures, the SBP intervenes. And we will continue to do so to make sure that there isn’t excessive volatility or ‘disorderly market conditions’, as economists say,” Baqir had said.