Ru­pee slide

The Pak Banker - - FRONT PAGE -

Over the week, the ru­pee de­pre­ci­ated by 3.5 per­cent against the dol­lar. Ac­cord­ing to the State Bank of Pak­istan, this de­pre­ci­a­tion was "mar­ket-based ad­just­ment" which im­plies that the cen­tral bank was not in­volved in mar­ket in­ter­ven­tion. This is the third time since De­cem­ber 2017 that the ru­pee has de­pre­ci­ated - 5 per­cent on 12 De­cem­ber 2017 in the wake of what was ar­guably a rec­om­men­da­tion by the In­ter­na­tional Mon­e­tary Fund mis­sion dur­ing its First Post- Pro­gramme Mon­i­tor­ing Dis­cus­sions and on 20 March 2018 by 4.5 per­cent.

SBP's ex­pla­na­tion for the de­pre­ci­a­tion all the three times was sim­i­lar: "ex­change rate move­ments will con­tinue to re­flect the de­mand-sup­ply con­di­tions in the for­eign ex­change mar­ket. And it will con­tinue to closely mon­i­tor the for­eign ex­change mar­kets; and stands ready to in­ter­vene to curb the emer­gence of spec­u­la­tive pres­sures." This means that there is a thresh­old for in­ter­ven­tion by the SBP would per­haps in­ter­vene.

The ques­tion is whether the cu­mu­la­tive de­pre­ci­a­tion of 13 per­cent is enough to achieve the ob­jec­tives that are patently ev­i­dent: to check the grow­ing trade deficit as well as to shore up the fast de­plet­ing for­eign ex­change re­serves. Pak­istan's trade deficit dur­ing the first eleven months of the cur­rent fis­cal year widened to 33.9 bil­lion dol­lars with an im­port surge that con­tin­ued un­abated on the back of China Pak­istan Eco­nomic Cor­ri­dor while ex­port growth due to the ex­port in­cen­tive pack­age was in­suf­fi­cient to ar­rest the rise in trade deficit. In May alone, im­ports were 5.8 bil­lion dol­lars while to­tal im­ports were es­ti­mated at 55.2 bil­lion dol­lars dur­ing the first eleven months of the year ac­cord­ing to the Pak­istan Bureau of Sta­tis­tics.

Ex­perts are of the opin­ion that the cu­mu­la­tive de­pre­ci­a­tion would be suf­fi­cient to bring about sta­bil­ity in the econ­omy and the care­tak­ers would need to take emer­gency mea­sures to check all un­nec­es­sary im­ports, with the term un­nec­es­sary get­ting ever more re­stric­tive, in­clud­ing 100 per­cent mar­gins on cer­tain prod­ucts while not vi­o­lat­ing the World Trade Or­ga­ni­za­tion's rules, and mak­ing bank state­ment of the per­son gift­ing the ve­hi­cle a re­quire­ment for im­port of used cars.Prior to the sec­ond de­pre­ci­a­tion in March, Pak­istan's for­eign ex­change re­serves were 11.944 bil­lion dol­lars which de­clined fur­ther to 10.041 bil­lion dol­lars by 1 June 2018 ac­cord­ing to the SBP web­site - an amount that is not suf­fi­cient to meet the three-month im­port min­i­mum re­quire­ment. In other words, the de­pre­ci­a­tions in De­cem­ber and March were sim­ply not enough to check, leave alone re­verse, the trade deficit or to strengthen the for­eign ex­change re­serves.

Ex­pe­ri­ence shows that wait and see has been a favoured pol­icy de­ci­sion of our fi­nance min­is­ters in the past given that de­pre­ci­a­tion im­plies a rise in the coun­try's ex­ter­nal in­debt­ed­ness that con­strains the de­vel­op­ment al­lo­ca­tions made in the bud­get. How­ever, with the mas­sive rise in the coun­try's ex­ter­nal in­debt­ed­ness to over 92 bil­lion dol­lars, the ac­tual im­pact would be that much more dam­ag­ing. It is in­deed a dan­ger­ous com­bi­na­tion: a heavy de­pen­dence on bor­row­ing from the ex­ter­nal com­mer­cial bank­ing sec­tor at high rates with short amor­ti­za­tion pe­riod and a sus­tained over­val­ued ru­pee pol­icy se­ri­ously com­pro­mises eco­nomic sta­bil­ity as is the case now. Surely, the way out is to strengthen our eco­nomic pillars. We should have a new in­dus­trial pol­icy aimed at rais­ing pro­duc­tiv­ity and push­ing ex­ports to bring more for­eign ex­change into the coun­try. Bor­row­ing and more bor­row­ing is not a vi­able op­tion.

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