Rupee’s plunge fuelling inflation, economic concerns

KARACHI: The consistent devaluation of the rupee is not only causing inflation but is also compelling the central bank to raise interest rates to mitigate the repercussions of uncontrolled depreciation of the local currency, according to bankers who manage exchange rates and imports.

The State Bank of Pakistan (SBP) reported that the dollar appreciated by Rs1.40 to reach Rs304.45 in the inter-bank on Wednesday.

“The market is not in control of anyone. The steep devaluation will continue and even cross the limit given by the IMF,” a senior banker said, adding that nobody knows what is next for the exchange rate.

Under the Standby Arrangement (SBA), the IMF will provide $3 billion in three instalments over nine months and is willing to witness a 20pc devaluation of PKR against the US dollar in FY24.

US dollar up by Rs1.40 to Rs304.45 in interbank and Rs325-Rs330 in kerb

However, in less than two months of the current fiscal year, the PKR has devalued by 10.5pc, or Rs29 per dollar. On July 4, when the IMF approved the SBA, the dollar in the inter-bank market was traded at Rs275.44, which reached Rs304.45 on Wednesday.

“This fast deprecation of local currency is alarming for the government in charge. There must be some pause in the frequent free fall of the rupee,” said Atif Ahmed, a currency dealer in the inter-bank market.

Shamshad Akhtar, the interim finance minister, reportedly said on Wednesday that unfortunately, “we have done everything to weaken the economy”. She further said in Islamabad that Pakistan’s economic situation was “worse than anticipated”.

“Such statements from the finance minister are nerve-wracking. The bleak situation has already shattered market confidence. We can only wait for further worse,” said Mr Atif.

There has been strong speculation in financial circles that the interest rate will be raised again to counter the escalating inflation. The devalued PKR is driving up the cost of imports, which, in turn, is inflating the economy beyond the expectations and calculations of economic managers.

According to analysts’ reports, inflation for August is predicted to range from 26pc to 28pc, while the government’s expectation is around 21-22pc. This sharp rise in inflation is expected to prompt the SBP to address it with a further interest rate hike. The interest rate is already at a record high of 22pc, which has already diminished the possibility of domestic investments. A further increase could prove devastating for trade, industry, and overall economic growth, which is projected to be at 2.5pc in FY24.

Analysts said that adopting a market-based exchange rate could potentially spare Pakistan from unnecessary import restrictions, promoting economic growth. However, the country currently struggles to meet the escalating demand for dollars. The SBP could only manage to save up to $8bn in reserves, but there are no signs of further inflows, which sends weak signals to the currency market.

“The only way to save your money is to buy any foreign currency rather than keeping PKR,” suggested a currency dealer in the open market. He said the open market is attracting the general public for their savings. The dollar rate as quoted by the Exchange Companies Association of Pakistan was Rs319.5, but it was difficult to buy dollars at this rate. The dollar was in the range of Rs325 to Rs330.

Published in Dawn, August 31st, 2023



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