The Dilemma of Rupee Devaluation

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Fears of currency depreciation have started to loom over the economy, as fate of Mr. Ishaq Dar as country’s Finance head becomes uncertain with every passing day. Mr. Dar’s hold on the Government’s economic decision has become somewhat less gripping ever since Mr. Shahid Khaqqan Abbasi has been installed in the office of Prime Minister.

Currency devaluation and the consequences thereof have been discussed time and again throughout Mr. Dar’s tenure. Some national, supra national organizations have hinted that the currency urgently needs a depreciation as the Rupee is overvalued by 5-20%. Industry experts however, say that the timing for depreciation may not be right at the moment as Pakistan’s imports are double to those of the Exports.

Depreciation would wreak havoc and hurt the overall population in general and turn the situation disastrous for common people. Despite agreements from senior economists, financials that the Rupee at the moment is overvalued by more than 20% against the Dollar, the country would not be able to handle the shock. Many developed economies, including those of China, India, France and Germany have also devalued their currency at different times to realign external trade following a surge in Dollar’s value.

Rupee Depreciated significantly from 5-7th of July, weakening by more than 3% with the backing of State Bank of Pakistan, however, the decision was reversed after Mr. Dar intervened and brought the currency up by 2.35% on next day.

Currency Movement – 5th July to 7th July, 2017

Date

Open

Close

4th July, 17

104.86

104.9

5th July, 17

104.89

108.250

6th July, 17

108.00

106.25

7th July, 17

106.00

106.15

10th July, 17

106.20

105.25

 

Experts anticipate the situation to get worse as repayment schedule begins during the year, and Rupee will witness a sharp reduction in value.

With total Government debt standing at $75 billion, the government has to begin paying off billions of dollars of CPEC related loans in the coming 5-7 years.

Conclusively, the market is still undivided as to whether the new Finance Minister after Mr. Dar would allow the currency to devalue as new Prime Minister, Mr. Shahid Khaqan Abbasi, in a recent interview disregarded any plans by the government to devalue the Rupee. Even if Government does decide to devalue, if it does so by even 10%, the inflation would rise to 15% and exports sector would only benefit by 5%.

Posted on: 2017-09-29T12:57:00+05:00

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