November 30, 2018 / 7:39 AM / in 5 months

Pakistani rupee tumbles in chaotic trading as IMF bailout looms

KARACHI/ISLAMABAD (Reuters) - The Pakistani rupee swang wildly during chaotic trading on Friday, plunging more than 6 percent in the morning in an apparent central bank devaluation before paring most of the losses in the afternoon.

A currency trader counts Pakistani Rupee notes as he prepares an exchange of U.S dollars in Islamabad, Pakistan December 11, 2017. REUTERS/Caren Firouz/Files

Dealers linked the currency weakness to Islamabad’s ongoing talks with the International Monetary Fund (IMF), but the finance ministry rejected those claims and new Prime Minister Imran Khan urged the nation not to panic.

“There is nothing to worry about,” said Khan, adding that further rupee weakness is unlikely.

By 3.45 p.m (1045 GMT), the rupee was down only about 1.5 percent from its opening level of 134, paring most of its losses after tumbling to 143 in early trading.

“Today is a circus,” said one market participant. “Let’s hope there’s some sanity (soon).”

During previous devaluations, the rupee did not swing so sharply, or recover most of its losses.

The rupee has lost more than a quarter of its value against the dollar since the first devaluation in 2017, as officials weaken the currency to tame a ballooning current deficit that threatens to trigger a balance of payments crisis.

But devaluations have stoked inflation to a four-year high and piled political pressure on Khan to stabilise the economy, with growth forecast to slow sharply next year.

Traders say the State Bank of Pakistan (SBP) effectively devalues the currency by withdrawing support in the thinly traded foreign-exchange market.

The SBP had no immediate comment when contacted by Reuters.

Finance Minister Asad Umar said the rupee level is set by the central bank but he denied the apparent devaluation was carried out to appease the IMF, saying the current rate has “nothing to do with the IMF”.

He blamed the previous government’s “strong rupee” policy for the instability.

“This kind of artificial policy does not work. The longer you hold on to it, the worse it will blow up. And that is what we saw,” Umar told reporters in Islamabad.

The central bank has hiked its main interest rate by 275 basis points since January, to 8.5 percent, and another rise is expected later on Friday when SBP announces its latest rate decision.

Inflation hit 7 percent last month, the highest level since September 2014, stoking unease amid rising food prices.

The IMF predicts that economic growth, which hit 5.8 percent in the year to the end of June, will slow sharply from a 13-year high. The IMF last month predicted growth would ease to 4 percent in 2019 and about 3 percent in the medium term.

But the economy will still need its second IMF assistance package since 2013, when the IMF loaned Pakistan $6.7 billion.

This month, Pakistan and the IMF failed to agree on a bailout package during a visit by an IMF delegation, with Pakistani officials setting mid-January as the target date for the new package to be signed off by the IMF.

Writing by Drazen Jorgic; Editing by Simon Cameron-Moore and Nick Macfie

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