According to the latest report of Moody’s Investors Service, rupee will continue to depreciate against dollar in the near future after five percent devaluation last month. The investor service warns that the negative impacts of the depreciation are looming large, requiring the State Bank to take immediate steps to arrest the situation. It says that further depreciation of rupee will open the floodgates of inflation in the country which had been kept under a tight control during the last four and half years’ tenure of the Pakistan Muslim League-Nawaz government. However, Moody’s believes depreciation of five percent will not have any significant effect on the economy, but keeping in view the current market trends, further depreciation could not be ruled out. It is unfortunate that the government circles are still defending the State Bank’s decision with regard to the depreciation of the rupee, ignoring the fact that the action will increase import bill of raw material and will ultimately affect the export of value added goods from Pakistan. Those who devise policies probably live in a country other than Pakistan and are seemed to be ignorant of the ground realities. They have failed to learn from the past mistakes as depreciation of rupee has always backfired and has thrown the economy into abeyance.
In the current situation, Moody’s hope the current account deficit will be kept within three or four percent of the gross domestic product because of the high import intensity of domestically driven growth. It also warns that depreciation of rupee will further increase the country’s debt burden, which reached 68 percent of the GDP at the end of the fiscal year 2016-17. The debt situation is likely to worsen further as around one-third of which is denominated in foreign currency. The bank is likely to face inflation as the first challenge of the imprudent decision. The economic activities have already slowed down, job market is saturated and industry is facing liquidity crunch. Devaluation of rupee will also increase the cost of production and ultimately affect exports which are already going down. According to Moody’s, the decision of depreciation will also have pressure on foreign exchange reserves and it will be difficult for the government to absorb the shocks.
