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.