And the Rupee Falls

Date:

Pakistani rupee, which plunged nearly 50 percent against the US Dollar under the Pakistan Tehreek-e-Insaf government, will remain under pressure due to the gnawing trade deficit, huge debt repayments and simmering political uncertainty.

From 123 in August 2018, the rupee plunged to a record 185-plus against the dollar by early-April 2022. This makes it one of the highest devaluations of the currency in Pakistan’s entire history

As the PTI government did steer the economy to some sort of stability, by the time it left on April 10, the economic indicators, including import bills and trade balance have been showing a worsening trend in the wake of rising imports that are putting pressure on the rupee. Under the International Monetary Fund’s (IMF) programme, the State Bank of Pakistan (SBP) has left it to the market forces to determine the exchange rate, which further accelerated the free fall of the rupee.

With inflation now running in the double digits, the delay in the release of funds under the IMF’s 7th review, the gradual decline of foreign reserves, skyrocketing global oil prices and the political instability in the country, the Pakistani rupee continues to remain under constant pressure.

Leading economist and social policy analyst Abid Qaiyum Suleri said that Pakistan’s imports remain higher than exports. “The current account deficit — currently at $544 billion — has widened because Pakistan has to make import payments in dollars and owing to the short supply of the greenback, the local currency depreciates.”

Suleri said that recently Pakistan repaid a loan to China and as a result, foreign reserves have further dipped. The current political uncertainty is also adding to Pakistan’s economic woes as investors have chosen a cautious path that has also led to the “dollarisation of the economy,” he added.

While explaining the SBP’s hands off approach, Suleri said that the central bank can only interfere in stabilising the rupee “when you have enough dollars through export earnings, foreign direct investment or remittances. But in Pakistan’s case, dollars remain in short supply.”

He said that he was against the policy of borrowing dollars and releasing them into the market to stabilise the local currency. “If the SBP resorts to pumping dollars in the local market to stabilise the local currency, its own reserves would dwindle and the trade deficit would further widen. This would create more demand for the US currency and Pakistan would face another crisis in the shape of a dollar crunch.”

He said that if you set an artificial rate of the dollar, as was done under the previous PML-N government, the cost of imports would increase.

He said that in the short term, Pakistan needs to review energy prices and take some tough decisions. He said that if Pakistan keeps energy prices at the current subsidised rates till June — and if their prices continue to go up in the international market — the country will have to spend more dollars against imports which will further take a toll on foreign reserves and put pressure on the rupee.

“Pakistan will have to pay attention to imports substitution and unnecessary imports have to be curtailed and the energy prices have to be set according to the international rates and subsidies, if absolutely necessary, will have to be given selectively.”

Refusing to speculate about the future levels of the rupee against the dollar, he said that could lead to the selling or buying of dollars. “It will have to be seen how the current or the new government deals with the IMF and clinches a deal with China for the rollover of the loan payment.”

He said that the Gulf countries may increase their oil output which may bring down the oil prices, cushioning the blow Pakistan is currently facing in the shape of expensive imports of commodities, including oil and coal.

“Pakistan is currently facing a dollar crunch and the heavy payments on imports are taking a toll on the foreign reserves, which is putting pressure on the rupee.”

WhatsApp Image 2022 04 05 at 3.46.33 PM edited | Balance Sheet from Narratives Magazine

Suleri said that the international factors, including the Russia-Ukraine conflict and the COVID-19 pandemic, have played their part in intensifying Pakistan’s economic challenges as no country could have predicted them.

“The rupee is under constant pressure because oil, steel, coal and iron ore prices all have skyrocketed in the international market and Pakistan is a net importer of all these commodities.”

He said that Pakistan needs a drastic cut on the import of luxury goods and must levy higher taxes on their imports to save dollars.

At the same time, exports need to be increased and the government must focus on local manufacturing.

Waqar Masood, former advisor to Prime Minister Imran Khan on Revenue and Finance, said that the government’s lopsided policies have to be blamed for the devaluation of the rupee.

“The PTI government blamed the previous government for stabilising the local currency through artificial means, but [left] the rupee to the market forces to play havoc with it.”

Masood said that now the IMF fully dictates Pakistan’s economy and when the PTI government attempted to resist their demands, the international lender pulled the string and withheld the seventh tranche of the programme, which resulted in a further dip in foreign reserves — which were, he said, about to touch around 20 billion dollars in August 2021, but fell to 12 billion dollars by March end.

He said that instead of imposing taxes in the budget, the government introduced the mini-budget under the dictation of the IMF and opened the economy abruptly and generously gave funds to legislators. 

He said that Pakistan also received a $3 billion loan from Saudi Arabia and separately offered a $1 billion deferred payment facility for oil import as part of a special economic support package, but nobody knows where all this external aid went or where it was spent.

“The devaluation of the Pakistani currency is being dictated by the IMF and the country has become subservient to the monetary policies of international lenders to determine currency rates.”

He said that the economy is going through a period of volatility because the demand for the dollar has risen and no government can do anything to contain this upward trend in the near future. The possibility of a further slide in the value of the rupee cannot be ruled out but that would be disastrous for overall economic growth, he said.

Arsalan Siddiqui, research head at Optimus Capital, said that the delay in the IMF’s seventh review was one of the main reasons behind the depreciation of the rupee.

He said that despite the 16 percent rise in exports, the current account deficit being at a sustainable level of $545 million in February and strong growth in large scale manufacturing, the sudden rise in oil prices and exogenous shocks were posing a threat to the gains made on the economic front. He said political uncertainty is also adding to Pakistan’s woes as rising oil prices are eating up foreign reserves and putting constant pressure on the local currency.

The high oil import bill remains the primary factor taking a toll on local currency, while debt servicing is the other factor responsible for the fall in the foreign exchange reserves, thus putting further pressure on the rupee, he said. He said that Pakistan is left with no option but to resort to more borrowings from international lenders to stabilise its dwindling foreign reserves, which, in itself, remains an uphill task.

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