PAKISTAN: Stocks tumble as rupee is devalued

20 September 1996

Stocks slid to a new year-low on 10 September after the State Bank of Pakistan (SBP - central bank) devalued the rupee by 3.79 per cent against the dollar, breaking a pattern of gradual downward adjustments (see Stock Market Watch). The bank cut the rupee rate to $1=Rs 36.97/37.1549 from $1=Rs 35.62/35.7981.

The bank has defended the devaluation, claiming it will improve the economy in the long term. 'This action is to strengthen not weaken the economy,' SBP governor Mohammed Yaqub said on 10 September. He argued that the move would have a nominal affect on inflation and foreign debt servicing,but would boost exports, end currency speculation and attract remittances from Pakistanis working abroad.

Bankers were taken aback by the SBPs decision. 'The devaluation is contrary to expectations, as most people were prepared for a gradual adjustment, not a one-step devaluation,' says Zuna Mansoor at ING Barings. The value of the rupee against the dollar has dropped by 7.95 per cent since 1 January, and bankers expect it to fall by a further 3 per cent by the end of the year.

The SBPs move comes ahead of planned talks with the IMF at the end of this month.

Pakistan is trying to persuade the fund to resume disbursements of a $600 million standby loan, which have been delayed by uncertainty about the 1996/97 budget. The IMF wants to know how Islamabad will cut its budget deficit to 4 per cent of gross domestic product (GDP) this year.

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