March 20, 2018 / 6:17 AM / in 8 months

Pakistani rupee weakens sharply in likely devaluation by central bank

ISLAMABAD/KARACHI (Reuters) - Pakistan’s rupee weakened sharply against the dollar on Tuesday in what appeared to be a currency devaluation by the central bank, traders said, the second such intervention in less than four months.

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

The apparent devaluation comes at a time when Pakistan’s nearly $300 billion economy is showing signs of vulnerability despite surging growth rates.

The rupee PKR= plunged to about 115.5 per dollar in early trading from 110.5 at Monday's close, traders said.

Abid Qamar, spokesman for the State Bank of Pakistan (SBP), told Reuters the rupee plunge was a “market driven” event.

However, foreign exchange traders say the central bank’s withdrawal of support for the rupee in daily market operations on Tuesday sent the currency lower.

The SBP devalued the local currency in a similar manner by about 5 percent in December amid balance of payment pressures due to a widening current account deficit and dwindling foreign reserves. The market was broadly expecting another devaluation this year.

“Apparently the central bank withdrew support,” Fawad Khan, head of research at BMA Capital, told Reuters on Tuesday.

Withdrawal of support would have the effect of devaluing the currency as the SBP is the most influential player in the thinly-traded local foreign exchange market and controls what is widely considered a managed float system.

In response to Reuters’ queries about the rupee’s decline on Tuesday, the central bank’s Qamar said it was triggered by “some payment pressures which are building within the market” and added that the central bank would be “observing the market where it is moving towards.”

A sharp drop in militant attacks and vast infrastructure investments by China have propelled Pakistan’s economic growth to above 5 percent, the fastest pace in a decade.

But a surge in imports, in part driven by purchases of machinery for the Chinese Belt and Road projects, has widened Pakistan’s current account deficit and prompted analysts to suggest the country may need an International Monetary Fund (IMF) bailout in the coming 12 months.

The IMF, which last provided a bailout package to Pakistan in 2013, earlier this month said the Pakistan’s short term outlook was “broadly favorable” while also warning that “continued erosion of macroeconomic resilience could put this outlook at risk”.

LOOMING ELECTIONS

Analysts have warned for some time that the currency remains overvalued.

“We believe this is much needed as Pakistan’s external account has deteriorated as of late,” the Topline Securities brokerage said in a flash note to clients on Tuesday morning after the rupee weakened.

With a general election due in less than six months, analysts say the government will be reluctant to pursue many of the unpopular or politically-damaging measures such as turning to the IMF again, or loosening the currency peg that could further weaken the rupee and usher in higher inflation.

Miftah Ismail, Pakistan’s de facto finance minister, last month told Reuters that his country will not need another bailout as exports are increasing and foreign reserves are being well managed.

Capital Economic, a macroeconomic research consultancy, said it expects the government to keep running down its foreign reserves until after the election in order to keep the rupee pegged.

“Once the election is out of the way, however, more drastic action is likely,” Capital Economics said in a research note.

Reporting by Syed Raza Hassan and Drazen Jorgic; Writing by Drazen Jorgic; Editing by Sam Holmes, Joseph Radford and Kim Coghill

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