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Karachi: Pakistan's currency slumped to a record low against the dollar yesterday as rising oil prices exacerbate concern about its yawning trade deficit and high inflation.
The dollar closed at Rs69.25 in official interbank trading yesterday compared to Rs67.70 the previous day. The rupee's previous low was about Rs68 to the dollar in the wake of the September 11, 2001, terrorist attacks, a level it also touched in 1998, after the country's nuclear test.
Rising oil prices and falling foreign investment are fuelling Pakistan's balance of payments problems and inflation, both of which undermine demand for and confidence in the rupee.
The currency has shed about 10 per cent of its value against the dollar since late February amid rising doubts about whether Pakistan's fast economic growth is sustainable.
The slide has coincided with the formation of a new coalition government, which accuses the previous administration loyal to President Pervez Musharraf of neglecting and concealing the problems.
Meanwhile, inflows of investment and remittances from Pakistanis working overseas have failed to keep up, limiting the demand for rupees.
World Bank warning
The World Bank warned in March that Pakistan risked an economic "crisis" unless its new government took stern action.
The government is currently preparing a budget that is expected to include unpopular cuts in government spending and efforts to raise more taxes to contain a deficit expect to reach at least six per cent this year.
A widening deficit forces the government to borrow heavily. Heavy government debts can also undermine a currency.
Officials have already slashed costly fuel subsidies, leading to a hike in the price of gasoline and heating oil for ordinary Pakistanis. Food price inflation is also running well into double digits.
Iffat Ara, an economist at Social Policy and Development Centre a Karachi-based policy institute, said the central bank, the State Bank of Pakistan, appeared to have stopped trying to hold the currency close to Rs60 to the dollar.
That policy had left the rupee vulnerable to a correction that is hitting poorer Pakistanis particularly hard, she said.
"Costlier oil imports coupled with depreciating rupee would take the inflation to new highs for the year unless the government comes out with any strategy to curb it," Ara said.
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