Is devaluation going to help?

THE unannounced devaluation of Rupee against US Dollar, which started in October last year, continues unabated creating panic among people about its effects on economy and their household budget. The value of greenback shot up by as much as Rs11.70 in the interbank market during trading on Tuesday before closing at Rs133.64. The statement and clarification issued by the State Bank of Pakistan over the massive devaluation in just one day showed that the move has tacit approval of the authorities concerned and there are apprehensions that the Rupee may shed its value further in days to come to close at about 145 a dollar.
The SBP claimed that this adjustment in exchange rate along with lagged impact of recent hikes in the policy rate and other policy measures to contain imports will correct external account imbalances. This is fifth devaluation since October 2017 and cumulatively the Rupee has gone down by 27% against the Dollar. The mute defence of Rupee by SBP is a clear message to currency dealers that Rupee would lose its value further in line with reported understanding with the International Monetary Fund (IMF) as Pakistan has finally decided to secure a bailout package in the face of financial crisis and pressure on balance of payments. According to the IMF, Pakistani Rupee is overvalued while a fast rise in international oil prices is also adding to country’s problems. In this environment, economic growth will slow down and inflation will rise. Whenever Pakistan goes to the Fund, there are two main demands – devaluation of the Rupee and increase in tariff of electricity and gas. Authorities have all along been advocating that Rupee was over-valued and its devaluation would give a boost to dwindling exports. However, never in the history any devaluation led to significant increase in exports but the measure ended up adding to the debt burden of the country and price-hike for people.
The government decision to allow wholesale devaluation is contrary to public statements and stance of PTI leaders who have been opposing such moves in the past. This also shows the government is devoid of any new idea to address financial and economic problems of the country and is resorting to same old tactics that never proved beneficial for the country in the long run.

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