Pakistan’s central bank allowed the rupee to decline on Friday as it bowed to persistent economic pressure, including widening deficits and declining foreign-exchange reserves.
The rupee closed at 107 per dollar at the close on the interbank market, after falling as low as 109.5 per dollar, the State Bank of Pakistan said in an emailed statement. The currency – officially a managed float – has been held steady at about 105 per dollar since July, when the central bank last let the rupee fall temporarily, causing a spat between the regulator and the finance ministry.
“Continuation of high growth in imports led to a widening of the current account deficit and consequently to depletion in the country’s foreign exchange reserves,” the central bank said. “These pressures have persisted, leading to the adjustment in the interbank exchange rate.”
The apparent turnaround to weaken the currency amid government opposition comes after calls from investors, economists and the International Monetary Fund for Pakistan to abandon its grip on the rupee. They argued that more flexibility was needed as the nation’s economy faces increasing signs of stress. The move was initially blocked by Finance Minister Ishaq Dar, who voiced opposition to the July devaluation and immediately appointed a new governor at the central bank.
However, Dar was granted medical leave in London last month and faces arrest on corruption charges if he returns to Pakistan. Prime Minister Shahid Khaqan Abbasi took over the finance portfolio from Dar. While Abbasi reiterated Dar’s stance that there would be no currency devaluation, he also conceded that Pakistan’s political turmoil has negatively affected the country’s economic prospects and investor confidence.
“This movement in the exchange rate is based on demand and supply of foreign exchange in the interbank market,” the State Bank said, adding that it stands ready to intervene “for smooth functioning” of the market.
With national elections looming next year, South Asia’s second largest economy has been hit by political and economic troubles. Following a corruption scandal, Pakistan’s Supreme Court in July disqualified former Prime Minister Nawaz Sharif and ordered criminal proceedings against him and Dar after a probe into their finances. Both have denied any wrong doing.
A leak from a law firm last year brought about Sharif’s downfall. Files from the so-called Panama Papers showed his family had purchased high-end apartments in London via offshore companies. The government has also been weakened by recent hard-line protests in the capital Islamabad, causing the resignation of its law minister.
In an effort to shore up its finances, Pakistan raised $2.5bn in dollar-denominated debt last month to pump up foreign-exchange reserves that have slumped 29% to $12.9bn in the year through October.
“The government should let the currency be driven by market dynamics and it seems to be a beginning,” said Shamoon Tariq, the Stockholm-based vice chief investment officer at Tundra Fonder AB. “This sends a good vibe to investors.”
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