Rupee continues to tumble, down 3.1 per cent

LAHORE: The Pakistani Rupee (PKR) depreciated Rs1.85 against the Dollar (USD) in the interbank market as it continues to tumble in early trade sessions here on Tuesday. The drop follows a bailout agreement with the International Monetary Fund (IMF) that said that ‘market-determined exchange rate’ will help Pakistan.

Earlier on Monday, the rupee depreciated against the greenback and closed at 149.65 and a further decline was expected after the rupee traded at 152 in Monday’s next day settlement session.

The rupee opened Tuesday’s session at 151/152 against the dollar, briefly appreciating to 151.25/151.75 before falling to its current level of 151.75/152.5 with trades currently being reported at 152, according to Mettis Global.

It is pertinent to mention that this is the fourth consecutive trading session in which the rupee has witnessed a significant decline against the greenback, bringing the rupee down as much as 3.1 per cent in the recent devaluation spree.

Moreover, the State Bank of Pakistan (SBP), under the IMF’s direction has allowed the rupee to devalue and has also raised the policy rate by 150 basis points (bps) to 12.25 per cent in its Monetary Policy meeting held earlier on Monday. The increase of 150 bps in its Policy Rate to 12.25 per cent (almost 8-year high), takes the cumulative increase since January 2018 to 650bps, which was higher than market expectations.

In a poll of 29 respondents by Bloomberg, only 4 had expected a hike of 150 bps. Three respondents expected a hike of 50 bps, 2 expected 75 bps, 15 expected 100 bps and 5 expected 125 bps change.

The 150 bps increase is higher than the 50 bps increase in the previous monetary policy meeting in March 2019, and it comes right after the Staff Level agreement between the IMF and the government.

The SBP statement issued on Monday read, “The government of Pakistan has reached a staff-level agreement with the International Monetary Fund for 39-month long Extended Fund Facility of around $6 billion. The programme is designed to restore macroeconomic stability and support sustainable economic growth, and is expected to unlock considerable additional external financing.”

The statement added, “Trends in government borrowing reflect a widening fiscal deficit during the first nine months of FY19 when compared to the same period in FY18. In addition, a greater reliance on central bank financing of the deficit has acted to dilute the impact of previous monetary tightening.”

“Since the last Monetary Policy Committee (MPC), the exchange rate has depreciated by 5.93 per cent to Rs149.65 per USD, at the close of May 20, 2019, reflecting a combination of underlying macroeconomic factors and market sentiment considerations,” it added.

Moreover, analysts believe that this is just the beginning of the decline for the rupee.

Pak Kuwait Investment AVP Research Adnan Sami Sheikh told Profit, “The Pakistan Tehreek-e-Insaf (PTI) led government is underplaying the impact of the deal with the IMF on the economy and the general public.”

“As consumption and growth slow down, corporate earnings are going to decline as well. This will ultimately lead to job cuts and unemployment, which are already a huge problem for Pakistan,” he said.

He further added, “Under the current policies incomes will also fall as taxes and costs rise, ultimately putting the burden on the general public”.

Adnan speculated that the rupee will continue to fall and is expected to be valued around Rs180 by December 2020 against the US dollar.

It is also worth mentioning that the general public along with influential citizens of Pakistan have started a nationwide campaign against buying and storing up dollars. According to the new drive, people are advised to sell any dollar savings in an effort to deflate the dollar and restore the value of the rupee as the currency markets are flooded with excess dollars.