Despite last week’s deal with the IMF, the rupee continued to fall by 2% on Monday and 3% on Tuesday.
On Wednesday morning, the rupee was trading at 225 per dollar. It ended Tuesday at 221.99 after Fitch Ratings revised its outlook for Pakistan’s sovereign debt from stable to negative, though it kept its Long-Term Foreign-Currency (LTFC) and Issuer Default Rating (IDR) at “B-.
The Federal Reserve’s interest rates were increased and the South Asian market panicked in response because the escalation of risks came from Imran Khan’s party’s Tehreek-e-Insaf win in the by-election, which puts pressure on the country to regain a bailout deal with the IMF.
In an interview, Miftah Ismail Pakistan’s finance minister told Reuters that the rupee’s downturn is not due to economic fundamentals as it appears. What is primarily driving the rupee’s dip is negative political turmoil. Political turbulence will likely subside in a few days. Pakistan’s finance minister blames the sharp decline in the Pakistani Rupee on political tumult, saying he thinks market jitters will go away soon.
“The market is in panic and I fear the rupee will go down further,” Zafar Paracha, secretary-general of the Exchange Companies of Pakistan, a foreign exchange association, told Reuters earlier on Wednesday.
Economist Ahmad Paracha suggests that the depreciation of the rupee is not a result of IMF pre-conditions, however, this does not stop further depreciation. Pakistan adopted a market-based exchange rate recently, as advised by the IMF.
According to the finance minister, imports have been curbed, putting pressure on the rupee. However, this has also resulted in a decrease in the current account deficit during the first 18 days of June.
“The recent movement in the rupee is a feature of a market-determined exchange rate system,” the State Bank of Pakistan Director stated on Twitter last night.
Pakistan is struggling with fiscal and current account deficits, the currency lost 18% of its value in December, and it is rapidly depleting reserves.
Under the first rule of political change, new political leadership often means some form of turmoil and conflict. In May 2019, Prime Minister Shehbaz Sharif deposed his predecessor Imran Khan in a conflict with the state performance.
On Tuesday, Pakistani sovereign dollar bonds took a hit on the markets after Fitch’s move to downgrade its credit rating for Pakistan. The KSE 100 Index continued dropping as well.