Pakistan Currency Slides in Effective Devaluation: Rupee falls to near four-year low against the dollar

Pakistan’s rupee slumped to a near four-year low against the U.S. dollar Tuesday, the latest move downward in an effective devaluation of the currency that had been kept steady against the greenback for much of the past two years.

The rupee’s slide began Friday and continued after Pakistan’s central bank signaled a drop in its value would help the country’s economic growth. In all, the rupee has fallen 2.7% in the past three trading days, with one U.S. dollar buying 109.25 rupees in recent action, according to Thomson Reuters data.

With the exception of a short-lived plunge in July, the Pakistani rupee had held at around 105 to the dollar since late 2015, with the State Bank of Pakistan regularly intervening to maintain the currency’s value by selling down its foreign-currency reserves to buy rupees, analysts said.

But the policy has proved difficult to sustain as the country’s trade deficit has widened, thanks to a surge in imports. Net foreign-exchange reserves held by the central bank slumped to their lowest level in at least a year at the end of November.

“They have allowed [the rupee] to devalue,” said Umair Naseer, deputy head of research at Topline Securities, a brokerage firm based in Karachi, referring to the central bank.

The Pakistani rupee’s woes stand out in a year in which many emerging market currencies have performed strongly, thanks to robust global growth and relative dollar weakness as the Federal Reserve refrains from sharp interest rate increases. The Korean won has surged nearly 11% this year, while the Indian rupee has gained more than 5% against the dollar.

Until recent days Pakistan’s government has resisted calls to allow the rupee to fall, hoping that a stable currency would increase confidence in the South Asian nation’s economy. A steady exchange rate has also been seen as a way to encourage the thousands of Pakistanis who work abroad to send money home: Pakistan received $19.8 billion in foreign remittances in 2016—equivalent to 6.9% of the country’s GDP—making it the fifth-largest destination of such flows globally, according to the World Bank.

“A stable currency is seen as an electoral winner … so the authorities have been very reluctant to allow it to sell off,” said Charlie Robertson, global chief economist at Renaissance Capital. Pakistan is set to hold national elections in 2018 and has been plagued by political scandals, including one that led to the ouster of the prime minister in July.

But a sharp rise in imports in the fiscal year ended June, driven by increased shipments of petroleum, machinery and transport equipment, and a decline in exports, have led to a widening of Pakistan’s current account deficit. The Pakistani rupee could be overvalued by around 25%, Mr. Robertson estimates.

The International Monetary Fund in June called for Pakistani officials to allow for greater flexibility in the country’s exchange rate. Typically, a weaker currency makes a country’s exports cheaper globally and makes it more expensive for local residents to buy foreign goods, which should help narrow its trade deficit.

“There was a lot of pressure on the government to loosen its grip on the currency,” said Ruchir Desai, senior investment analyst at Asia Frontier Capital Limited in Hong Kong.

IMF officials are currently in Pakistan for discussions with the country’s leaders. Miftah Ismail, special assistant to the prime minister on economic affairs, said the devaluation has “no relation at all with the IMF.”

Pakistan’s political turmoil has sapped investor demand for the country’s stocks, even after they were admitted to MSCI’s popular index of emerging-market shares this year: The benchmark KSE 100 has dropped 20% this year. The country recently tapped the international bond markets, raising $2.5 billion.

The Asian Development Bank expects Pakistan’s GDP to grow by 5.3% in 2017 and 5.5% in 2018, slightly lower than the averages for developing Asian economies in both years.

—Saeed Shah contributed to this article.

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