Rupee devaluation: tough times ahead

Recent news of Rupee’s devaluation against Special drawing right (SDR), a currency unit by International Monetary Fund (IMF) and steep fall in State Bank’s profits show that macroeconomic indicators are nowhere near the stability levels promised by PTI government. Dip in rupee’s value against SDR means that Pakistan will have lesser amount at its disposal in IMF vault in case it needs to top up exchange reserves. Stability against SDR is also important for a currency because most of international financial liabilities are paid back not in US dollars but in SDR which itself is pegged with a basket of several big international currencies. The fiscal year 2017-18 proved depressing for the country since the Pakistani currency faced a hefty depreciation of Rs25.096 against the SDR – a basket of world’s five major currencies – compared to Rs16.643 to the US dollar. This not only made the impeding IMF bailout less productive for Pakistan but also had a devastating impact on SBP’s annual profits which dropped by 26% to Rs175.67 billion during this financial year.

For a country replete with chronic economic problems, this latest wave of currency depreciation does not bode well especially in the context of potential foreign exchange inflows expected in the wake of recent fund-raising tours undertaken by PM Khan in Middle East and China. Any country looking to bring in foreign direct investment no matter how strategically significant our bilateral relation is will obviously demand a stable exchange rate in order to protect its national exchequer from abrupt fluctuations. This abstinent sentiment can be clearly seen in the relatively cold shoulder given by Chines govt during the most recent state visit. In order to attract foreign investors, the government must adapt policies to stabilize the exchange rate and provide ample support for which SBP must be freed from any kind of political influence.