Addressing the Senate’s Standing Committee on Finance on Wednesday (Aug 2), the deputy governor of the SBP, Riaz Riazuddin, admitted that it was his decision to depreciate the Pakistani rupee by 3.1 percent.
On July 5, the sudden dip in the rupee sent shockwaves that reverberated beyond financial sectors, with the Pakistani rupee at 108.25 against a strong dollar in the forex market. While some considered it to be yet another blow on the country’s economy, other deemed the change to be ‘artificial’, raising concerns among financial gurus and expert. Ultimately, the former finance minister Ishaq Dar had no choice but to call for an inquiry.
Speaking to the Senate Committee, Riaz said that as acting governor SBP, he had carte blanche to take time-sensitive economic decisions without consulting the Ministry of Finance.
During the meeting, the deputy governor expressed his opinions on the rupee being valued incorrectly. This echoes the IMF’s findings of an overvalued rupee by between 10 and 20 percent.
Riaz is also believed to have said that the unabated widening of current account deficits and foreign debt repayments urged him to introduce a dip in the rupee. The country’s current account deficit has, indeed, risen to an alarming level. Against the budget projections of $4.5 billion, the country current account deficit has ballooned to $12.1 billion.
Implications of Weaker Rupee
Depreciating the currency is generally perceived as a timely economic remedy. But most of the time this remedy has negative impacts on an already fragile economy.
Pakistan not only imports finished goods, but also raw materials for use in domestic industry production. A lower currency rate would immediately impact raw materials being used for value-added production.
An FMCG product like soap may have components (aromatics or coloring agents) that were imported. When the rupee is weak, the price of imports and subsequent production will significantly increase, resulting in high prices being passed on to consumers.
Imports (especially those that are absolute necessary and do not have any alternative in the local market) such as life-saving medicines become expensive to buy. This takes a toll on the purchasing power of the public.
The real-estate sector is a goldmine for most global economies. A weaker rupee would increase the price construction equipment, materials, inevitably adding to prices of built-up infrastructure, hurting demand.
This gap however, would be a golden opportunity for expats, allowing them to invest in real estate in Pakistan, taking advantage of a higher Rupee conversion. The increased inflow of foreign remittances would contribute to the strengthening of the economy, although much slowly.
Exports would obviously thrive, since higher priced exports are now cheaper due to currency conversion. Initially, exports would result in the inflow of local currency to the country, but as the inflows increase and economic pressures subside due to high forex reserves, the rupee would strengthen again.