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The Incredibly Shrinking Pakistani Rupee

Devaluation of the Pakistani currency risks fueling greater instability

by Farhan Bokhari

Behrouz Mehri—AFP

While the International Monetary Fund’s $451 million in emergency loans to help manage the fallout from the floods will help, its determination to enforce long-delayed and much needed economic reforms in Pakistan could fuel greater instability.

Government officials in Islamabad estimate the loss from the floods at $43 billion, and believe that the IMF’s stamp of approval will afford Pakistan the credibility to borrow from other sources. But likely lenders will also expect Pakistan to take unpopular but necessary economic decisions. On this score, the record of the embattled government is uninspiring.

Faced with fierce political opposition and a riotous public, the government has been unable to fully phase out fuel and power subsidies, as it had committed to the IMF in 2008; or to curb its expenses or impose a value-added tax to cover the services sector. Strapped for cash—Finance Minister Hafeez Sheikh recently said the government only has funds to provide two more months of salaries to federal employees—Islamabad is now considering devaluing the rupee by up to eight percent over the next 12 months, a move that could help kick-start exports, but worsen inflation.

“With or without the IMF coming to our rescue, a devaluation of the rupee is inevitable,” says Muhammad Suhail, a broker with Karachi’s Topline Securities. “If we don’t get a large injection of foreign funds, we will need to devalue.” Painful adjustments could be in store, including higher interest rates to combat inflation. “Given the scale of our economic disaster, we need the IMF,” he says, “and also its painful prescriptions.”

Inflation is the main worry. “The road ahead is uncertain, it’s impossible to make predictions,” says an official at the State Bank of Pakistan. Devaluation will increase the price of fuel and with it everything else that is transported to markets across the country. Inflation could go as high as 20 percent, says the central bank officer. In Islamabad, a senior official at the finance ministry sees the glass half full. “At least we’re not on a collision course [with the IMF] and the relationship is intact,” he says, asking not to be named.

The devaluation of the rupee and the inflation it spirals will not bode well for the government led by President Asif Ali Zardari that is already under fire for its handling of the economy and the aftermath of the floods. But Zardari’s party-led coalition may not have to take these tough decisions if rumors of an imminent Army-backed overthrow pan out. In either case, Pakistanis need to buckle up.

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