“Competition for more (gains) turns you away (from Allah), until you end up in (your) graves”, Al-Quran (102:1-2). The current plight of the Pakistani rupee is no different than that of a pilot gravitating towards earth just after being ejected from the cockpit of a disintegrating plane, at the mercy of his parachute with little certainty about its deployment. ; fearing that if he doesn’t deploy at the right time, his body will tear to pieces. Since July 2018, when the incumbent government took its rein, the rupiah has seen the highest currency depreciation on record of 56 PKR/USD, falling from 123 PKR/USD to its all-time high of 179 PKR/USD in January 2022. This fall against the greenback seems uncontrollable; is there a “messiah” who will come to the rescue of this plummeting rupee? !
Numbers never lie; this massive depreciation is due to the boom in the current account deficit (CAD), which jumped to $5.6 billion for the last quarter of 2021. This double-digit figure signifies the favor and competitiveness of the products, and the state of our economy in the international market and currently, the country imports goods with a value much higher than that of its exports; then, how does he make payments for expenses exceeding foreign trade income? Foreign exchange reserves (forex) make up for this difference; the only option is to exchange the rupee for dollars by dumping the local currency into the exchange, thereby driving up the dollar rate.
I wish we were in an Eldorado world with infinite foreign exchange reserves. As of December 2021, Pakistan had reserves worth $24 billion, while our neighbors Bangladesh, China and India had amassed $44 billion, $3.2 trillion and $633 billion respectively. reserve dollars. This is not problematic as long as the Forex bucket is filled with export earnings, foreign direct investment (FDI) and remittances, but in our case, even after more than seven decades of geographical independence, we depend external debts to fill this bucket. For this reason, our country is burdened with massive foreign debts, restricting the freedom of local legislators in formulating fiscal and monetary policies independent of Pakistan.
Undoubtedly, the International Monetary Fund (IMF) has always helped us, but as they say “nothing is free”, so that allows the IMF to hold the strings attached to the puppet that sets policy here in Islamabad. A good example of the IMF saying is seen by the dovish stance taken by the State Bank of Pakistan where we have witnessed a low single digit policy rate since the start of 2020. This move amid rising global prices commodity prices has made it more difficult to increase the competitiveness of our exports in international markets and has simultaneously made our imports more expensive, thus leaving the rupee vulnerable to further depreciation. To expect our exports to outnumber our imports would be an elusive dream in a situation where an agrarian economy, Pakistan, has reached an alarming degree of importing agricultural products! According to the United States Department of Agriculture Grain and Feed Annual Report, Pakistan’s wheat imports were estimated at 1.0 MMT for marketing year (MY) 2021/22 and 3 .4 MMT (for MY 2020/21).
Another reason attributable to this unwanted fall is related to geopolitical unrest in the subcontinent following the withdrawal of US armed forces from Afghanistan. It stopped the flow of United States dollars to Pakistan for troops previously involved in the war in Afghanistan and created an unfavorable imbalance between the inflow and outflow of dollars from Pakistan’s national treasury.
All of these events have a snowball effect in hampering business confidence and apprehension of further depreciation and then triggering the dangerous capital flight from the country where foreign investors withdraw their capital to safe havens and this is evident from the fact that FDI decreased to $1.9 billion (2021) from $2.6 billion (2020). It doesn’t stop there; speculators and hedgers also hoard dollar bills in the present with the intention of selling them in the future for big profits. The loss of confidence in the official banking channel makes a parallel Hawala and Hundi system flourish, this has a double effect; it reduces the flow of dollars into the country and opens the doors to money laundering without leaving a paper trail. This has obviously improved the social status of a few, but at the expense of what the rupee has experienced in recent years.
No messiah is going to handle the current economic collapse; however, requires a meticulous approach through SBP intervention to anchor the volatility surrounding the exchange rate. First, the practice of uncalculated flow of dollars into the market to artificially support the rupee must be stopped, this measure serves no purpose except to fan the flames for further depreciation through speculative auctions. Certainly, raising the policy rate to contain inflation and make local investment a lucrative choice for international investors is a wise choice, but it will not be an easy solution given the growth targets stipulated by the IMF. It has never been a best practice to ban imports or make imports expensive just to mop up the CAD, it is an injustice to limit the purchasing power of a formerly eligible buyer. A more realistic and sensible but long-term policy action is to make exports sufficiently competitive through structural and legislative reforms. Some imports such as petroleum products cannot be replaced by domestic products; however, export-oriented industrialization can bring about radical changes in the structure of our foreign trade. Broadening the spectrum of secondary industries will prove to be a successful effort for an agrarian economy by increasing the availability of refined secondary products, which currently must be imported. For any development program to succeed, the government must first establish the confidence of international economies in the local banking and monetary system and there is no magic wand to do this and only we must do this.
— The writer is a
learning in a
private organization in Islamabad & can be reached at: [email protected]