Chinese whispers after Pakistan’s currency nosedives

The mysteries of money.
The mysteries of money.
Image: Reuters/Akhtar Soomro
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On Wednesday (July 05), the Pakistani rupee went into a tailspin.

Within hours, the currency slumped 3.1%, its sharpest drop in a single day since 2008, sending panic waves across south Asia’s-second-largest economy. Eventually, the currency settled at 108.095 per dollar at the end of trade on July 05, the lowest closing level since December 2013.

“This is an earthquake for the currency market and badly shakes investor confidence,” Malik Bostan, president of the Forex Association of Pakistan, told The Express Tribune newspaper. Curiously, no one seems to know exactly what sparked this slide, although two theories have surfaced subsequently: deliberate devaluation and miscommunication.

Currency of confusion

The State Bank of Pakistan (SBP), the country’s central bank, is said to have engineered this fall, according to one version of the story. This depreciation is broadly aligned with Pakistan’s economic fundamentals and will boost growth, the central bank reportedly said  in a statement backing the fall.

“SBP is of the view that this depreciation in the exchange rate will address the emerging imbalance in the external account and strengthen the growth prospects of the country,” said the central bank.

Pakistan isn’t the first country to devalue its currency to support exports. China closely monitors the yuan and often manipulates it. Even Japan is believed to have devalued the yen. A weak currency makes the country’s products attractive to global buyers who can get more by paying the same amount. This helps improve the current account deficit (CAD), the difference between total value of imports and exports, along with net foreign remittances. A high CAD implies a country’s imports and investment abroad exceeds its exports. 

Pakistan has been struggling with a widening CAD for some time now. From $3.2 billion between July 2015 and May 2016, the deficit more than doubled to $8.9 billion between July 2016 and May 2017, an indication of weak exports. 

In an interview to Bloomberg, Pakistan’s commerce minister Khurram Dastgir Khan said that following similar moves by China, Turkey, and Thailand, he had been trying to convince finance minister Ishaq Dar to adjust the rupee’s value.

However, it looks like Dar himself was in the dark. He has blamed the rupee’s plunge on a “communication gap.” The finance minister believes the absence of clear correspondence between the central bank and other lenders and financial institutions led to the fall.

“I don’t believe any individual has this kind of authority to make such a big decision to make an artificial adjustment—and I am calling this artificial,” Dar said on Thursday, exposing a possible rift between the government and the central bank.

Dar said SBP deputy governor Riaz Riazuddin, too, did not know about the rupee’s steep fall.

On Friday, the government also appointed Tariq Bajwa as the new SBP governor, ending the reign of Riazuddin who had been in charge since May 2017. The government had till this month-end to find a governor, but Dar swung into action to look for a replacement soon after Wednesday’s currency slump.

Meanwhile, the Pakistan Stock Exchange, one of Asia’s best performing, has also been losing ground. It ended at 44,823 points on Thursday after hitting a record high of 52,388 in May this year. And although Pakistan’s economy seems set to grow at its fastest rate since 2007, GDP numbers for the last financial year (5.3%) were lower than the government’s own targets (5.7%).