Devaluation of Pakistani rupee fuels inflation

The constant devaluation of the Pakistani rupee has caused inflation and also compelled the central bank to raise the interest rates, Dawn reported.

The Central bank is raising the interest rates to mitigate the repercussions of uncontrolled depreciation of the local currency.

The State Bank of Pakistan reported that the dollar appreciated by Pakistani Rupee (PKR) 1.40 to reach PKR 304.45 in the inter-bank on Wednesday.

“The market is not in control of anyone. The steep devaluation will continue and even cross the limit given by the International Monetary Fund,” a senior banker said, adding that nobody knows what is next for the exchange rate, reported Dawn.

Under the Standby Arrangement (SBA), the IMF will provide USD 3 billion in three instalments over nine months and is willing to witness a 20 per cent devaluation of PKR against the US dollar in Fiscal Year 24.

However, in less than two months of the current fiscal year, the PKR has devalued by 10.5 per cent or Rs 29 per dollar. On July 4, when the IMF approved the SBA, the dollar in the inter-bank market was traded at Rs275.44, which reached Rs 304.45 on Wednesday.

“This fast deprecation of local currency is alarming for the government in charge. There must be some pause in the frequent free fall of the rupee,” said Atif Ahmed, a currency dealer in the inter-bank market.

Shamshad Akhtar, the interim finance minister, reportedly said on Wednesday that unfortunately, “we have done everything to weaken the economy”. She further said in Islamabad that Pakistan’s economic situation was “worse than anticipated”.

There has been strong speculation in financial circles that the interest rate will be raised again to counter the escalating inflation. The devalued PKR is driving up the cost of imports, which, in turn, is inflating the economy beyond the expectations and calculations of economic managers, as per Dawn.

The sharp rise in inflation is expected to prompt the SBP to address it with a further interest rate hike. The interest rate is already at a record high of 22 per cent, which has already diminished the possibility of domestic investments. A further increase could prove devastating for trade, industry, and overall economic growth, which is projected to be at 2.5 per cent in FY24. (ANI)