Pakistani rupee weakens sharply in likely Devaluation by central bank

(Sadaf Shaheen, )

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy – since a weaker currency will boost exports, which in turn will lift employment.Another result of devaluing the currency is the reduction of government debt because the government is paying debt holders (treasury bond investors) with cheaper rates.

Devaluation means decreasing the value of nation’s currency relative to gold or the currencies of other nations. .

In each previous instance, abrupt devaluation brought about economic distress, which lasted for several years. There is no justification in repeating actions that have failed in the past The Pakistan’s rupee 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 by Bloomberg It is their drug. Your pain, is their joy.

“If reserves keep going down and there’s no mechanism to finance deficits then you’re left with only one option -- devaluation,’’ Salman Shah, a former Pakistani finance minister, said in a telephone interview from Islamabad. “They couldn’t support the rupee at the level it was and the central bank’s ability to intervene in the market has vanished.’’

There are many reasons why devaluation and raising tariffs have been detrimental to Pakistan’s economic development in the past are:
First, the country’s imports are inelastic and a weaker rupee will not help. Mostly, they consist of raw materials (petroleum, chemicals and metals), intermediate goods or machinery. Any devaluation would increase their cost and thus make Pakistani exporters less competitive.

Secondly, devaluation will raise the cost of servicing our external debt. Currently it is estimated to be around $70bn. If the rupee declines by 25pc, so will the external debt in local currency.

According to government figures, devaluation of rupee during 2008 to 2013 caused the debt to swell by Rs1.909 trillion in local currency. Thus, devaluation instead of easing the balance of payments will further exacerbate it.

Third, devaluation always increases inflation as essential items such as petroleum, food and chemicals constitute almost half of our total imports. When elections are around the corner and there is so much instability, can the government afford to make life more difficult for the poor and the middle class?

Fourth, it has taken the country almost 10 years to rebuild investor confidence to an extent. International investors are gradually making a comeback. Their investment in the local stock exchange reached a 15-month high last week.

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.

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