The Pakistani rupee fell from 152 rupees to the dollar in May 2021, the rate used for budget projections, to 179 rupees to the dollar and then recovered to 176.51 rupees on 7 January 2021. There is a perception in this country that the rupee value is market-based, as part of the staff- level agreement on 12 May 2019 between Pakistan’s then economic team leaders — Dr Hafeez Sheikh, de facto finance minister and Dr Reza Baqir, Governor State Bank of Pakistan — with the International Monetary Fund; however, this is incorrect.
As per the IMF website, it was agreed to implement a market determined exchange rate that “will help the functioning of the financial sector and contribute to a better resource allocation in the economy.”
Market determined is defined in IMF documents as a rate without a specific exchange path or target with indicators for managing the target being broadly judgmental, including balance of payments position, international reserves, and parallel market developments and; adjustments may or may not be automatic and intervention maybe aimed at moderating the rate of change and prevent undue fluctuations (disorderly market conditions) that may be direct (through purchase/sale of dollars by the central bank) or indirect (exerting its power as the banking sector’s regulator).
The release of one billion dollars (the sixth IMF tranche) subsequent to the passage of the two pending bills in parliament will strengthen the rupee but by no more than a couple of rupees per dollar. Fitch Ratings has projected an average rupee rate per dollar at 180 for 2022 against its earlier projection of 165, maintaining that “our expectation for the currency to weaken further is based on Pakistan’s worsening terms of trade, righter US monetary policy, alongside the flow of US dollars out of Pakistan and into Afghanistan.”
It is critical to acknowledge that the value of a currency is a symptom rather than the cause of the poorly performing macroeconomic indicators. For this reason, Business Recorder has consistently maintained that the judgement call by the SBP after May 2021 is questionable for five disturbing reasons.
First, reserves are at a high of over 17 billion dollars today but 50 percent are debt-based including swap arrangements, multilateral and bilateral support, commercial external bank borrowing, issuance of debt equity (sukuk and Eurobonds) and the 3 billion dollar Saudi loan parked in the SBP for one year at terms even more stringent than by the commercial banking sector abroad. In other words, while the SBP is claiming sufficient reserves yet the rupee erosion paints a more accurate picture of the state of the economy.
Second, the trade deficit has widened to levels higher than those in September 2018 when the current account deficit reached an unsustainable 20 billion dollars. While in 2017-18, remittances were less than 20 billion dollars, last year’s inflows reached a high of 29.6 billion dollars or, in other words, remittances’ capacity to absorb much of the current account deficit rose dramatically during the pandemic.
However, in recent months remittances have begun to decline as the global lockdown is scaled down. Claims of a rise in the value of exports rather than quantum is pandemic-related rather than any success in raising exports while imports continue to rise unabatedly.
Third, parallel market adjustments are not in synch with other regional countries specifically as regional countries sport a discount rate differential of between 4 percent to nearly 5 percent – a differential that skews the cost of inputs in their favour with a consequent impact on external trade.
The argument is that the rupee was allowed to depreciate from June 2021 onwards because the SBP was, entirely for political reasons, unable to raise the discount rate to bring it into the positive realm. Its 14 December decision to raise the discount rate to 9.75 percent in the aftermath of the staff-level agreement with the Fund forged on 24 November 2021 allowed it to begin to intervene in the market which accounts for the recent rupee gains though they are not significant.
Fourth, Pakistan’s inflation rate is higher by 5 to 10 percentage points compared to regional countries’. This is mainly due to (i) rupee erosion with imports accounting for inflationary pressures; (ii) rise in administered prices as part of the deal with the IMF; and (iii) excess cash being pumped into the economy by the government with a dramatic rise in current expenditure — from 4.2 trillion rupees inherited by the Khan administration to 7.5 trillion rupees budgeted for this year with over 1.2 trillion rupees understated due to debt relief initiative by G-7 to enable poor countries to deal with the pandemic. And finally, the heavy reliance on borrowing is extremely worrying.
The PTI administration raised total indebtedness from 95 billion dollars to a little over 130 billion dollars today. It procured 42 billion dollars in loans during its three and a quarter years with around 10 billion dollars used for budget support — current expenditure — while the remaining amount was used to pay off interest and loans which were not only acquired by previous governments but also by the incumbent government. Therefore, it can be safely concluded that the rupee slide is a strong symptom of our worsening economic infirmity and warrants an urgent revisit of our monetary and fiscal policies that would address the fault lines that beset our economy.