Minister blames 'political turmoil' as Pakistani rupee falls record low against US dollar

Tariq Butt / Reuters

Pakistan's Finance Minister Miftah Ismail on Wednesday blamed the rupee's slide on political turmoil, saying he expects market jitters over the currency's sharp decline to subside soon.

The South Asian country recently passed through another bout of political instability, with the government of Prime Minister Shahbaz Sharif taking over from ousted premier Imran Khan in April.

"The rupee downturn is not due to economic fundamentals," Miftah Ismail told Reuters. "The panic is primarily due to political turmoil, which will subside in a few days."

Pakistan is also suffering from fast depleting foreign reserves, a declining currency and widening fiscal and current account deficits, with the rupee losing 18% of its value since Dec.21.

The rupee fell 2% on Monday and 3% on Tuesday despite last week's staff level agreement reached with the International Monetary Fund that would pave the way for a disbursement of $1.17 billion under resumed payments of a bailout package. Miftah Ismail has said that the tough decisions taken by the government has caused a setback to it.

"The government would be able to manage an external financing gap of $4 billion soon,” he said. "We will be able to fulfil the external financing gap of $4 billion soon. We will satisfy the International Monetary Fund [IMF] and there will be no problem to manage the external gap.”

About the rising pressures on exchange rate and persistent depreciation of rupee against the US dollar, the finance minister said the import compression was paving the way for getting the desired results as imports in first 18 days of July stood at $2.6 billion, and it was expected that the total import bill would not exceed beyond $5.5 billion for whole July 2022. The dollar was appreciating against all other currencies, he said and added the economy would be stabilised.

Officials said the repayments obligation created increased the demand for dollar in the interbank market, but the State Bank of Pakistan did not intervene in the market, so the rupee continued its nosedive against the dollar.

On Wednesday morning, the rupee was trading at Rs225 per US dollar, having ended on Tuesday at Rs221.99 after Fitch ratings agency revised its outlook for Pakistan sovereign debt from stable to negative — though it affirmed Long-Term Foreign-Currency and Issuer Default Rating at "B-."

Analysts said political uncertainty arising after the Punjab by-polls, the IMF delay and the depleting foreign exchange reserves have had adverse impacts on the market.

During a chat with a TV channel, Ismail said the rupee’s depreciation was not currently linked to supply and demand. He said the rupee was continuously falling due to political instability, gambling and speculations. But at the same time, he said the danger of default was not looming over Pakistan.

"There is panic in the market, I fear it (the rupee) will go down further," Zafar Paracha, secretary general of a foreign exchange association, the Exchange Companies of Pakistan, told Reuters.

Paracha said he did not see any reason for the depreciation in the rupee other than possible IMF pre-conditions.

Neither the government nor the IMF have said anything about the need for any further depreciation of the currency, though Pakistan recently adopted a market-based exchange rate under advice from the IMF under the economic reforms agenda.

Ismail said imports, which put pressure on the rupee, have been curbed and the current account deficit has been contained in the first 18 days of the new fiscal year this month, and pressure on the rupee would ease moving forward.

He told a news conference that the IMF believed a $4 billion funding gap still existed and this would be bridged by various friendly countries that he declined to identify.

One of them, he said, had offered $1.2 billion in financing for oil purchases that would be finalised soon. Another had pledged to invest $1 billion in the Pakistan Stock Exchange (PSX) and while third had promised $200-$300 million in gas on deferred payments.

A fourth country had offered 2 billion in SDR (special drawing rights) deposits, Ismail said. Reserves have fallen to as low as $9.8 billion, hardly enough to pay for 45 days of imports.

"Over the last three months we tried to curtail imports, we had some success and some failures...With the ban on imports of foreign-assembled cars and cell phones, we have benefited,” Ismail told reporters.

"We have asked for State Bank of Pakistan permission for letters of credits required for imports worth between $100,000 and $500,000, which the central bank generally does approve, but the process takes eight to 10 days," he said.

The measures taken so far had cut imports from some $7 billion in June to just $2.6 billion in the first 18 days of July, he said.

On Tuesday, sovereign dollar bonds issued by Pakistan suffered sharp losses to record lows after Fitch's move, while the Pakistan Stock Exchange's KSE100 Index .KSE fell 2.36%.