NationalVolume 13 Issue # 24

Pak rupee in free fall: What next?

The rupee has once again fallen by 5.7 per cent against the US dollar, taking the cumulative depreciation of the exchange rate to 18.7 per cent during the last seven months. Before this devaluation the dollar was traded at Rs121.60-65 while the open market was trading the dollar at Rs124.50.The open market traded dollar as high as Rs132 but the exchange companies of A category said the rate was Rs129.The dollar is short in the open market and most of the exchange companies refused to sell the currency. Dealers said a week is required to gain confidence of the market with the new dollar price as they were not aware of the next devaluation plan. Some analysts believe that the open market rate would be adjusted in the next few days that could be higher by Rs4 per dollar compared to the banking rate.

According to a statement by the State Bank of Pakistan, this movement in the exchange rates reflects the demand-supply gap of foreign exchange in the interbank market. The statement has pointed to the growth rate of the economy, adding that “this high growth has been accompanied with a notable deterioration in the country’s balance of payments. Despite a double-digit growth in exports (year-on-year 13.2pc in July-May FY18) and a moderate increase in remittances, strong demand for imports (year-on-year growth of 16.4pc in July-May FY18) have pushed the country’s current account deficit to the levels not sustainable beyond the short run.”

In this context, the State Bank has underlined the rising levels of aggregate demand in the economy, echoing a theme emphasised in its monetary policy statement as well as its third quarterly report released earlier. Clearly, the SBP is of the view that the adjustment in the exchange rate along with the increased policy rate and other administrative measures, would help contain domestic demand in general, and reduce the imbalances in the country’s external accounts in particular. Last week, the Governor State Bank, when asked about the likelihood of further depreciations, said that rupee-dollar parity and interest rates are the two tools with which the central bank deals with foreign exchange related pressures, and “we are using both of them.”

Emergency currency devaluations of this kind have been described as quick fixes, with the short and long term dividend being cheaper exports. But even here, there are implications for international trade. For, if a country persistently sells goods below market price, it risks anti-dumping charges as per World Trade Organisation rules. Also not to be overlooked is how a weakened currency offers less interest on loans, thereby boosting inflation.

In short, a devalued rupee will not stem the tide of economic decline even in the short-term, given how this exacerbates already gaping current account and trade deficits. Back in March, the rupee’s previous tumble gave way to the lowest levels of dollar reserves in three years. Fast-forward to this month and the country is left with $9.6 billion in foreign reserves, sufficient to cover imports for two months only.

In the midst of present political uncertainty, there is one thing of which we can be sure. That is, regardless of whosoever triumphs at the ballot box, the country will be almost immediately set off, begging bowl in hand, to the International Monetary Fund. IMF handouts are not always the best remedy for local economies. Yet, experts reckon that Pakistan may end up with a 13th bailout. And as we know, this contributes to a boom-bust economy. Central to the IMF repayment scheme is the upping of foreign direct investment (FDI). But this, as has been well documented in various survey reports, encourages a “race to the bottom” in terms of lowering social and environmental protection costs. Which is another way of saying that loan recipient nations are stranded in a no-win situation.

Even though it seems clear that an IMF bailout package may be in the pipeline, the next government will need to assess its impact in the long run. Not least due to the incredibly high interest rate on loans, the effect of which was cushioned the last time around by low oil prices at the global level, thereby helping Pakistan to clear its $6.6 billion in IMF dues back in 2016. Yet today, international crude supplies are in a precarious situation, with Libya, Iran and Venezuela facing American sanctions which may or may not be part of a larger US trade war.

In this context, the incoming set-up will have to ask international creditors for a little breathing space; at least until it assesses how the FATF grey-listing will affect trade relations. Such appeals must be particularly be made to China, which has been making large cash injections by way of several loans outside of the CPEC framework.

It goes without saying that the next government will have to take many tough decisions, such as addressing the fundamentals — with or without the IMF package. An immediate requirement is to cut government expenditure – both developmental and non-developmental- and adopt a strict austerity regime for all sectors of the economy. Imports must be contained and exports boosted by all means possible. All debt repayments should also be put on hold and creditors should be asked to wait at least for  a year during which the economy can go through a process of gradual recovery.