The State Bank of Pakistan (SBP) has been keeping the rupee afloat since the last two years, opting to keep its value mostly unchanged since 2015.
However, with the general elections in Pakistan due in 1 year, the pundits are weighing in – how long is this artificially-induced stability of the Pakistani rupee going to last?
Anonymous sources say that local banks refuse to trade the Pakistani rupee for a value higher than Rs. 104.87 per dollar. They also said that SBP assists with the foreign currency balance, ensuring that it keeps the Rupee currency value steady. The sources who disclosed this chose to remain anonymous for fear of getting reprimanded by the bank.
If anyone tries to trade at a value higher than Rs. 104.87 per dollar, they receive a call from the regulator within minutes.
Free Floating Currency
Government and SBP officials argue that the rupee is a free floating currency, reacting to supply and demand changes. Contrary to their assertions, the rupee is the only currency to have gained value against the dollar since 2014, by 0.5% to be exact, as per Bloomberg.
The Pakistani economy, despite all the current upbeat buzz surrounding it, faces some serious issues. The current account deficit has increased three fold to $7.3 billion in ten months. Exports have fallen to their lowest point since the last 6 years. Foreign exchange reserves for Pakistan have decreased 15%, falling to $15.9 billion in May from $18.9 billion in October.
An economics professor at Iqra University Karachi, Muzaffar Ali Isani, says,
Its artificial, I don’t think there is any stability, however there’s an enforced stability. You have to keep in mind this is an election next year. At least to the run up of the election they will try and keep it unchanged.
Back in 2013, Pakistan was at the verge of a debt crisis, which was staved off by Prime Minister Nawaz Sharif opting for the $6.6 billion IMF loan program. IMF itself says that Pakistan’s currency is overvalued by 20%.
Why SBP is Keeping The Rupee Stable?
When asked why the SBP is trying to keep the rupee stable the bank replied,
Like many other central banks, State Bank of Pakistan occasionally intervenes in the market with the objective to contain the excessive volatility in the exchange rate and ensure smooth functioning of the domestic foreign exchange market.
There is also the CPEC aspect to consider. With China injecting as much as $55 billion for CPEC related projects across the country, concerns have been raised that Pakistan would be left with a huge foreign debt. This, coupled with any depreciation in the value of the rupee would make matters worse.
Widening Trade Gap
Ashfaque Hasan Khan, former Finance Ministry adviser and Dean of the Business dept. at National University of Science and Technology, says,
Keeping our rupee strong means a stronger economy, and this is mindset of this government. However, how can you align this type of exchange rate with an unprecedented rise in trade gap? It’s against economics.
The trade deficit is also piling up. It currently stands at $3.2 billion in April, slightly lower than the last month’s number. This is at its lowest point since 2003.
Foreign Investors Fleeing The Market
Deputy head of research at IGI Finex Securities Ltd. Saad Khan says that investors are selling stocks at the PSX over concerns of an overvalued rupee. Foreign investors have sold stocks worth $232 million in 2017 even after MSCI re-evaluated Pakistan as an emerging market.
If the SBP and government’s interventions are removed from the picture the rupee will depreciate by 8 percent by next year according to Saad bin Ahmed from Multiline Securities Pvt. According to him, currency devaluation is coming after the next elections.