How the currency markets are viewing Dar’s indictment

Some are certai­n rupee is likely to lose value, others say uncert­ainty will prevai­l

Ishaq Dar. PHOTO: Reuters

KARACHI: Despite the government vehemently stating that the rupee would keep its current strength, currency dealers believe Finance Minister Ishaq Dar’s recent indictment by the National Accountability Bureau has increased chances of a value-correction.

“The rupee may lose its value in case Dar is replaced by a new finance minister,” a currency dealer said on the condition of anonymity.

Dar is a strong proponent of a stronger rupee since he does not find it a workable solution for reviving exports and dealing with stubborn challenges on the external trade front.

However, majority of the international lending institutions, independent economists and analysts disagree, estimating that the rupee is overvalued by up to 20% against the dollar.

Auto part makers concerned over rupee’s strength – and its weakness

Strong economies like those of China, India, France and Germany have also devalued their currencies at different times to realign external trade following a surge in the dollar’s value.

New Prime Minister Shahid Khaqan Abbasi has also ruled out the possibility of devaluation. The open currency market, along with other stakeholders, prefers that the rupee be allowed to depreciate gradually, rather than the traditionally sudden and dramatic drop.

The rupee has already seen a slow-paced depreciation in the last 12 weeks. It lost almost a half percentage point to Rs105.42 per dollar on Thursday, from Rs104.90 per dollar on July 4, 2017 in the interbank market, according to the State Bank of Pakistan (SBP).

The correction is seen following the sudden drop of 3.19% on July 5, 2017 when the SBP decided not to intervene in the interbank market and a reversal of 2.35% on the next day when Dar intervened.

“It is more surprising to note that the rupee has remained stagnant despite massive ups and downs in the economy, especially on the external trade front,” an analyst said. “The rupee should have responded to the vibes, I think.”

“Rumours regarding devaluation are becoming stronger. The present government has taken large amounts of foreign loans in the last four years. The crisis will come to a head when the government is forced to repay the ballooning foreign debt, leading to a sharp reduction in the value of the rupee,” a currency dealer warned.

The government’s foreign debt currently stands at $75 billion.

Going forward, the government also has to pay off billions of dollars to China as the harvesting period of CPEC projects starts.

However, Forex Association of Pakistan President Malik Bostan said that the market has lost hope for a devaluation following PM Abbasi’s firm refusal.

“The market is upset due to Dar’s indictment. If Dar is replaced then it would be a great setback to the rupee and the entire economy. He should stay on as finance minister,” he said.

He added that there is pressure from international financial institutions like the International Monetary Fund and economists to devalue the rupee.

Finance czar: Double whammy for Ishaq Dar

Another currency dealer Zafar Paracha agreed there is uncertainty regarding the rupee’s future value following Dar’s indictment.

Federation of Pakistan Chambers of Commerce and Industry President Zubair Tufail believes rupee devaluation will create more problems in the economy rather than solving the existing issues.

“Depreciation of the rupee will increase inflation in the country, as value of imports is more than double the export,” he said.

“Suppose the rupee is devalued by 10%, it would increase inflation by 15% and revive exports by around 5% only,” he claimed.

Published in The Express Tribune, September 29th, 2017.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.

Leave a Reply

Your email address will not be published.

three × 1 =