Pakistan's New Prime Minister Rules Out Devaluation

  • Currency devaluation not an option, Abbasi says in interview
  • Pakistan’s current account deficit has more than doubled

Shahid Khaqan Abbasi.

Photographer: Asim Hafeez/Bloomberg

Pakistan’s new Prime Minister Shahid Khaqan Abbasi has his economic task cut out. Twin deficits are depleting the nation’s foreign-exchange reserves and constraining credit ratings, stoking speculation that he’ll opt to devalue the rupee to spur inflows.

That won’t happen, Abbasi said in an interview late Saturday. With fresh elections due next year, the government is instead looking to curb imports through tariffs and help boost local production.

“Devaluation is our option, theoretically, even though it should incentivize exports but in reality it doesn’t,” Abbasi said in the interview at the former house of Pakistan’s founder Muhammad Ali Jinnah in Karachi. “So at this moment as I said devaluation is not on the table.”

Pakistan’s current account gap more than doubled to $12.1 billion in the year ended June while its trade deficit surged to a record $33 billion as imports climbed. The nation’s reserves have plummeted by a quarter to $14.3 billion since reaching a peak in October, while the rupee has remained stable. As a share of the economy, the nation’s 2.9 percent projected current account gap compares with 1.5 percent in India and 1.9 percent in Indonesia, according to International Monetary Fund estimates.

Political turmoil, twin deficits and falling reserves had heightened speculation the government would mark down its currency, giving investors another reason to stay away from the world’s newest emerging market. Abbasi said his government, which took over after his predecessor was ousted by a court ruling, will focus on cutting “unnecessary” imports.

The situation is poised to worsen as equities in the nation, which was given emerging market status by MSCI Inc., plummet. The nation’s benchmark stock index entered a bear market after it dropped more than 20 percent from its peak in May. But the nation’s currency has been resilient with help from central bank interventions. It is the most stable currency in Asia since 2014, according to data compiled by Bloomberg.

“It is only a question of when, not if, the rupee will depreciate,” said Firat Unlu, an analyst at the Economist Intelligence Unit in London. “A weaker currency is needed to correct the imbalances in the external sector and stem the drop in foreign-exchange reserves.”

Still, Abbasi expects economic growth will meet the government’s 6 percent target for the year ending June. That confidence stems from Chinese investment in the nation. China is financing power plants and infrastructure projects valued at more than $50 billion as part of Chinese President Xi Jinping’s “One Belt One Road” push. It will help end energy outages before elections that have resulted in long cuts at homes and factories.

A rising middle class is creating demand for goods and services and has attracted overseas investors including Vitol SA, Puma Energy and Royal FrieslandCampina to tap increasing demand for everything from fuel to milk. Pakistan’s net borrowing will ease slightly to 4.3 percent of gross domestic product in 2017 compared with India’s 6.4 percent and Indonesia’s 2.4 percent, the IMF estimates.

To read more on how devaluation can impact Pakistan’s stock market

The removal of former Prime Minister Nawaz Sharif after a court-mandated probe into his family’s finances did hurt business sentiment but projects will continue as planned and growth target will be met, according to Abbasi.

The government won’t seek another IMF bailout package and is poised to introduce "radical" tax reform, he said. Sharif had taken a loan from the multilateral lender to stave off a balance-of-payments crisis in 2013, and the facility was completed in September.

It shows the system is “insulated” from politics, said Abbasi. “It’s election year. It’s a polarized situation. It’s a very charged atmosphere.”

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