Rupee Plunges (Again) As Pakistan Authorities Unleash 'Soft' Capital Controls

A month ago, we warned that Pakistan was in panic mode as its currency and FX reserves were plunging ahead of a critical looming election.

The situation has only got worse as nearly 106 million men and women in Pakistan are going to cast their vote tomorrow to determine the fate of more than 12,000 candidates fighting for 270 national and 570 provincial assembly seats. The Pakistan elections 2018 are being closely watched by the world because the outcome will determine what direction the country will take amid the economic crisis and political instability.

The 2018 general elections have become more interesting. Former PML-N chief Nawaz Sharif, one of the most influential players in Pakistani politics, was jailed for 10 years in a corruption case right before the elections. The election campaigns by political parties have ended, and people are going to cast their votes tomorrow.

However, as the voters go to the polls, Pakistan’s central bank has increased the amount of red tape needed to access dollars, according to people with knowledge of the matter, as the nation’s foreign-exchange reserves drop at the fastest pace in Asia.

The country has been roiled by domestic political and economic turmoil and was not helped last month when Moody’s changed the outlook on Pakistan to negative from stable citing heightened external vulnerability risk.

Moody’s affirmed its B3 rating

Says foreign exchange reserves have fallen to low levels and will not be replenished over the next 12-18 months, absent significant capital inflows.

Moody’s says low reserve adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks.

It certainly looks like they are losing control of the currency.

Dollar reserves have dropped to the lowest level in more than three and a half years and record imports have widened the current-account deficit. Pakistan has devalued its currency three times since December in an attempt to ease the pressure.

Which is why authorities appear to be implementing the 'soft' capital controls.

As Bloomberg reports, the State Bank of Pakistan has told banks after a currency devaluation last month that importers will need to inform the regulator of any requests for the U.S. currency a day in advance and fill out a form for import payments, according to people familiar with the matter, who asked not to be identified as they are not authorized to speak to the media. The measure applies to transactions that are not backed by a bank’s letter of credit, said one of the people. The Karachi-based central bank didn’t respond to a request for comment.

“Once you go into high current account deficit and reserves deplete, this happens,” said Asad Sayeed, director at the Karachi-based consultancy Collective for Social Science Research. “Investments are going to be affected. Your high growth time is over now.”

Pakistan’s economy faces “some very daunting challenges,” but the decision to approach the International Monetary Fund for support will have to be taken by the new government after tomorrow's ballot, according to caretaker Finance Minister Shamshad Akhtar.

Notably all of this carnage has accelerated since the start of January which coincided with Pakistan's decision to ditch the dollar (following Trump's remarks) and get closer to China.

"SBP has already put in place the required regulatory framework which facilitates use of CNY in trade and investment transactions," the State Bank of Pakistan (SBP) said in a press release late Tuesday, ensuring that imports, exports and financing transactions can be denominated in the Chinese currency.

"The SBP, in the capacity of the policy maker of financial and currency markets, has taken comprehensive policy related measures to ensure that imports, exports and financing transactions can be denominated in yuan," Dawn news, Pakistan's most widely read English-language daily, announced while quoting the SBP press release.

Image source: WION News

As we reported in December, Pakistan has been contemplating the move since last month's formal launch of the Long Term Plan for the China-Pakistan Economic Corridor (CPEC), signed by the two sides on November 21. The CPEC is a flagship project of China's Belt and Road initiative - the 3,000 km, over $50 billion corridor which stretches from Kashgar in western China to Gwadar port in Pakistan on the Arabian sea.

Will China step up?