In December last year, with the then finance minister Ishaq Dar admitted in a London hospital amidst an array of corruption cases, the State Bank of Pakistan (SBP) withdrew its support for the rupee.
As a result, the rupee fell by around five percent to 110 against the US dollar, after hovering around the 104-105 mark since 2015 and around 100 since 2013, when the Pakistan Muslim League-Nawaz (PML-N) led government came to power.
With imports having surged in the first quarter of this year and foreign exchange reserves plunging, the rupee devaluation was long overdue in order to address the gaping balance of payment.
With a change at the helm of the Ministry of Finance, the rupee saw fall of five percent in March this year as its value touched 115 against the US dollar. The SBP cited “payment pressures building within the market,” as trading drove the currency southwards in a bid to contain the imbalance in the external account and growth trajectory.
Another roughly five percent dive followed in June, in the lead up to Eidul Fitr, with the market now dictating the rupee price, taking it to 121 against the America currency.
With an uptick in remittances expected around Eid and despite the central bank not interfering in the rupee value, relative stability was expected in the lead up to the elections. Instead, what followed was the rupee gatecrashing the 130 mark before settling around 128 against the US dollar at the end of last week.
In July last year, Moody’s estimated that the Pakistani currency is overvalued by roughly 20 percent. Since then, the rupee has shed 21 percent, bringing it closer to its actual valuation.
China had agreed to a $1 billion loan in May, which was received by the Finance Ministry earlier this month. Chinese commercial banks have also lent another CPEC-linked $3 billion
“The rupee has now reached its true value and I don’t expect it to plunge any further,” said outgoing finance minister Miftah Ismail. Even so, he had virtually said the same words in a TV interview in March, when the rupee was hovering around 115 against the US dollar.
Ismail also conceded that the Dar regime’s policy of maintaining the artificial rupee value was “flawed”. But speaking about the record debt levels reached under the PML-N government, the former finance minister said that when compared with its predecessor, the increase is not as high.
“The numbers should be looked at relatively, and not in absolute terms,” Ismail said, before citing that the current debt, 71 percent of the GDP, compares to 64 percent at the time of the Pakistan People’s Party government.
He also cited international debt percentages. “Japan is 228 percent, Italy 123 percent, Singapore 111 percent, Sri Lanka 78 percent – all of these are higher than Pakistan’s,” he says.
Despite the rupee value being adjusted, exports have not exactly escalated to a point where they could come close to addressing the trade deficit. A bailout package for the Pakistani economy is inevitable.
Former Caretaker Finance Minister Salman Shah says Pakistan could look to other countries for support. “The next government would have to work on scheduling the bills, which should be done in the long-term, and also work on managing the debt. A short term solution could be a loan from China, and maybe renegotiations on some terms of the CPEC [China Pakistan Economic Corridor]” Shah says.
China had agreed to a $1 billion loan in May, which was received by the Finance Ministry earlier this month. Chinese commercial banks have also lent another CPEC-linked $3 billion.
However, what seems inevitable is for Pakistan to approach the International Monetary Fund (IMF) for a bailout package. Even though Miftah Ismail’s denies reaching out to the IMF, his delegation went to the US in April to discuss terms and conditions for the bailout.
“The next government will likely be going to the IMF,” Ismail said before Wednesday’s polls.
While addressing the budget deficit and indeed the current account deficit will be the next government’s biggest challenge, another financial fix that Islamabad finds itself in is the Financial Action Task Force (FATF) grey-listing Pakistan in June.
The terror watchdog has given Pakistan a 10-point task list, failure to pursue which could result in a veritable blacklisting threat for the country and in turn a global banking isolation that could further damage the already vulnerable economy.
While the military backed mainstreaming of the militants will be heavily scrutinised by the FATF, there are economic limitations hindering Pakistan as well.
“We have a significant undocumented economy, because a lot of the transactions in Pakistan are cash-based. And considering that as things stand there is no capacity to document the economy in its entirety, monitoring all money exchanges is impossible to monitor all money exchanges,” Salman Shah says.