Pakistan’s Weakened Currency Against Dollar Warrants Deficit

Pakistan’s Weakened Currency Against Dollar Warrants Deficit

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ISLAMABAD: Pakistan’s rupee weakened drastically against the dollar on Tuesday in what appeared to be a currency devaluation by the central bank, traders said, the second such intervention in the last three months.

The rupee plunged to about 115.5 per dollar in early trading from 110.5 at Monday’s close, traders reported.

The State Bank of Pakistan devalued the local currency by about 5% in December owing to the balance of payments pressures due to an exponential widening current account deficit and diminishing foreign reserves. The market was broadly expecting another devaluation this year.

Withdrawal of support would have the effect of devaluing the currency as the State Bank of Pakistan (SBP) is the most influential player in the thinly-traded local foreign exchange market and wheels what is widely considered a managed float system.

Pakistan’s economy has been growing at above 5%, the fastest pace in a decade, but an increase in imports has widened its current account deficit and prompted analysts to suggest the country may need an International Monetary Fund (IMF) bailout in the next 12 months.

“We believe this is much needed as Pakistan’s external account has deteriorated as of late,” the Topline Securities brokerage said in a flash note to clients on Tuesday morning.

 

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