On the morning of 5th July, when the rupee value dropped unexpectedly, it was startling to see that no intervention was made by the State Bank of Pakistan in the currency markets as rupee continued to lose its value. The central bank chose not to intervene in the currency market in order to allow the demand and supply factor determine the rate, in accordance with the market fundamentals.
Banks were told not to take any positions and allow rupee find its own value in the market. While the move was in line with the fundamentals of currency valuation, it was something that is not being followed in Pakistan for quite some time as the Finance Ministry wanted to keep the rupee in control and is in favor of a strong rupee dollar parity. However, a check was needed on the rupee to dollar parity as institutions like IMF believed that the value of rupee has been kept artificially high and the currency is overvalued by 5-20%.
Finance Minister Ishaq Dar blamed the acting governor, Riaz Riazuddin for not intervening in the market and creating an “artificial” decrease in the value of rupee. The move was taken in order to address the current account deficit as the value of exports continued to decrease. State Bank in a statement said that the “exchange rate of Rs. 108.25 was aligned with the economic fundamentals.”
The move was inevitable due to decrease in exports while imports kept increasing, resulting in increased trade deficit in the country. Trade gap in the first eight months of 2016-17 was $20.2 billion, which increased to $32.6 billion by the end of the fiscal year.
Exporters have been imploring concerned authorities to devalue the currency in order to boost exports. Other regional countries have been devaluing their currencies to lend a helping hand to their exporters, but Pakistan made no changes in its policy. Exports in the month of June were at the lowest point since 2010 with IMF warning that the macroeconomic stability gains from 2013-2016 are now crumbling.
A major reason for the government sticking to strong rupee is the service cost that it has to pay on its external debt and devaluation of currency will further push up these service cost.
For now, the rupee is back to its stable position of Rs. 105, but in the future there is a dire need to devalue the currency according to the demand and supply factor. If not, the declining exports in the country will continue to suffer in the future as well.