Battered Rupee

ByMalik Nasir Mahmood Aslam

Seasoned social activist


August 3, 2022

Malik Nasir Mahmood Aslam expresses anxiety at an extremely unstable Pakistani currency

Pakistani currency is facing relentless pressure and is simply buckling under it. The rupee resultantly lost tremendous purchasing power putting people into extreme jeopardy. A brief survey of the loss in value will indicate the abysmal track record of the rupee. By the looks of it the rupee depreciated almost 10 per cent annually, an extremely worrying prospect for any set of financial managers. Under the PMLN in June 2013, the nominal exchange rate was Rs.101 per dollar, whereas during the recent political turmoil it reached an unprecedented Rs.233, a whopping increase in percentage over nearly a decade that featured the PMLN, caretakers, the PTI and now a PMLN-led coalition government. From June 2013 to August 2017, under the PMLN government, the rupee depreciated from Rs.101.7 to Rs.105.3 or by 3.5 per cent. From August 2017 to August 2018, before the PTI assumed power, the rate was Rs.124 to a dollar, a depreciation of almost 19 per cent. Under the PTI, from August 2018 to April 2022, the rupee depreciated 47 per cent with the dollar rising from Rs.124 to Rs.182. The rupee lost 8.25 per cent of its value and closed to an all-time low of Rs.233.36 per dollar on 26 July from Rs.210.95 per dollar on 15 July.
Depreciation results in national depression and hurts the sentiments of people. People associate governance with stable currency and if the currency tumbles, the governance comes into question irrespective of the kind of government running the country. The salaried class and unemployed youth worry about the eroding value of the currency that makes imports expensive and causes inflation. As if the exchange rate crisis were not enough, industry has to deal with expensive imports, increased costs of electricity and outages and expectations of high inflation.
Financial experts tend to base their analysis on the long-term movement of the rupee-dollar parity and not an artificially stable exchange rate. The rupee depreciates because people demand more dollars. The exchange rate is a byproduct of one’s ability to generate production, confidence in economic policies and herd behaviour. A falling rupee reflects inherent weaknesses in economic management, especially on the supply side.
It is an acknowledged fact that Pakistan’s ability to produce is low and the country is losing competitiveness in global markets. Foreign investors have time and again revealed that they are not attracted to Pakistan as an economic market. In the past, government financial managers opened the floodgates of capital account before liberalising trade. Later, when this approach came unstuck the very same financial managers drastically reduced tariff rates yet the country could not attain the status of a globaliser. Exchange rate volatility is negatively related to the overall yield of bonds. It seems that the market forces are working at cross purposes. During various international financial crises, a high correlation has always been evident between the banking and currency crises. The interest rate is the channel left to the central bank to control in order to avoid financial crises. Unfortunately, this channel is not working as depreciation weakens the position of banks and creates a credit crunch. Though Pakistan’s economic structure does not have domestic liabilities in foreign denominations but speculators make windfall gains and this becomes a horrendous drain on national currency.
The market-driven exchange rate regime that Pakistan currently follows is also closely watched by the IMF and due to this oversight, the State Bank of Pakistan (SBP) cannot keep the rupee’s value artificially high. All it can do is to smoothen out extreme volatilities implying that the SBP can sell dollars into the market when the high demand for the greenback causes the rupee to lose too much value in a single trading session or a couple of consecutive sessions. This also means that the amount of the dollars thus pumped into the market will have to be bought back by the SBP at the end of the month or the end of a quarter in exceptional cases. This means that the rupee’s value will continue to be determined essentially based on forex demand and supply, even if it keeps dipping one all-time low after another during a certain period of high political instability, and eventually, it can regain its lost value if and whenever forex supplies in the market improve substantially.
It is therefore quite evident that the dearth of forex reserves, the SBP may only continue watching from the sidelines as the rupee falls from one all-time low to another. Meanwhile, growing political instability becomes the springboard of all kinds of speculations against the rupee’s health as well as Pakistan’s prospects of avoiding what to some skeptics appears to be an imminent threat of defaulting on sovereign loans. In addition, structural weaknesses of the external sector, higher global prices of fuel and food commodities, rise of the US dollar against major currencies, geopolitical challenges facing Pakistan and the delay in the revival of the IMF lending, all played their part in making the rupee weak and vulnerable to speculation-driven attacks. TW


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