Pakistan’s currency has suddenly and unexpectedly dropped for the first time in nearly two years, which analysts say is a deliberate move by the central bank to help deal with the country’s lack of foreign reserves.
The rupee dropped almost 3 per cent from 105 to the dollar to 108 on Wednesday, hitting a level not seen since 2013. It was the first significant move since 2015.
Economists say the Pakistani central bank had previously helped keep the currency artificially high, partly to boost the reputation of Nawaz Sharif, the prime minister, who has used the strong currency as proof of the country’s economic success.
But the strong rupee has also exacerbated the country’s lack of foreign exchange, with a combination of rising imports and falling exports, and remittances from abroad creating a reserves crunch.
“It looks like the central bank has allowed this to happen,” said Mushtaq Khan, chief economist at Bank Alfalah and a former chief economic adviser to the central bank. “It has taken all of us by surprise.”
In March, the central bank imposed import controls on a range of goods as it looked to stave off a repeat of the current account crisis that led to Pakistan having to be rescued by the International Monetary Fund in 2013.
Meanwhile, the country has also been helped by more than $1bn in emergency loans from China, deepening Beijing’s economic hold over its southern neighbour.
Pakistan’s current account deficit is expected to widen when the government has to start paying Chinese companies for projects that are part of the $55bn China-Pakistan Economic Corridor.
Some analysts predict Pakistan will be forced to return to the IMF at some point, while others say a crisis can be averted by allowing the currency to devalue.
Most did not expect a devaluation to happen until after next year’s general election, however. While the currency has no official peg, it has traded at close to 105 rupees to the dollar since late 2015. This is evidence, say economists, of support from the central bank.
Charlie Robertson, global chief economist at Renaissance Capital, said the move may have been triggered by a recent fall in inflation or the drop in equity prices during the past few months.
“The central bank might have thought that if foreigners were taking their money out of the country, why not let the currency drop a few percentage points,” he said.
Others say the move is an indication of the weakness of Mr Sharif, who is currently under investigation for alleged corruption following revelations made in the leaked Panama Papers.
One government minister said: “There is uncertainty caused by investigations against prime minister Nawaz Sharif and his family.
“Investors are becoming more and more nervous about the future.”