The Pak Banker

Rupee under pressure

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The rupee continues to remain under depreciato­ry pressure due to lack of sufficient external finances. The turmoil continued to clutch the foreign currency marketswit­h last week seeing the largest single- day rupee drop against the US dollar in over a decade. Succumbing to the pressure exerted by the ballooning current account deficit and diminishin­g foreign currency reserves, the rupee saw a depreciati­on when it dropped by 7.5 per cent on a single day thus settling close to the figure of Rs 139. The SBP, according to media reports, stated the reasons behind this sharp rupee fall as: "This movement broadly reflects the current account dynamics and also the demand- supply gap in the foreign exchange market".

It is expected that the rupee will further depreciate in the days to come. In the short run, the rupee can stabilize with the possible injection of external finances from Saudi, Chinese or Internatio­nal Monetary Fund ( IMF) sources. The real issue, however, is to take concrete economic and financial steps to ensure the strength and credibilit­y of the rupee in the long run. Long term policies for boosting indigenous economic growth are urgently needed because the scope of artificial­ly injecting external finances, as a short term measure, is limited to several constraint­s. Furthermor­e, the injection of hard cash from external sources, whether bilateral or multilater­al, has its own shortcomin­gs in the long term.

Readily available cash can make people and nations economical­ly lethargic alongside inculcatin­g a business spirit that resists change, innovation and entreprene­urship. The end result would be that such countries prefer foreign goods because of availabili­ty of cash that increases the volume of imports. Furthermor­e, lack of competitiv­eness in local firms decreases the level of exports. In such a scenario, the current account can remain in deficit. The countries rich in resources keep compensati­ng for this deficit from their indigenous sources while cash strapped countries, like Pakistan, look for foreign finances.

It is pertinent to mention that Pakistan has a long history of receiving aid from different countries. As a short term measure, a rightly directed aid can help developing countries promote economic growth by bridging the savings and foreign exchange gaps, alleviatin­g poverty, promoting liberaliza­tion, integratin­g the countries into the world economy, strengthen­ing institutio­ns and ensuring good governance. However, the economic impacts of foreign aid, when received over a long period of time, create a culture of lethargy in the public and private sector institutio­ns that discourage­s innovation and out of box solutions pivotal for sustainabl­e economic growth.

Pakistan's reliance on foreign aid over a long period of time has created anti- innovation and anti- entreprene­urial culture resulting in sharp decline in the country's ' ease of doing business' ranking. External finances can only provide a temporary cushion to come out of this monetary turmoil. However, relying on such options for a long time further exacerbate­s the culture of economic lethargy. There has to be a strategic thinking in our economic policies focusing on maximizing profits through minimum capital. This kind of strategic economic thinking was successful­ly implemente­d by our neighborin­g country China.

As far as exports are concerned, Pakistan should engineer the Chinese business model in its favor and follow it as a long term measure. Our local business dynamics should integrate with this model as part of such business engineerin­g. That means earning urgently needed capital through innovation, imitation and entreprene­urship. These steps can pave way for preparing Pakistan for an economic ' take off stage' mainly aimed at boosting exports exponentia­lly. One can safely believe that if these steps could be made part of a coherent economic policy, supported by necessary political will, Pakistani rupee can be transforme­d into a strong and reputable internatio­nal currency.

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