Pakistan made the right decision on Friday to allow the rupee to depreciate. The decision should have come sooner, but that it was made at all indicates that a more competent economic policy is being enacted.
Former finance minister Ishaq Dar had been resisting calls for depreciation for the past six months. The rupee has been holding at 105 to the dollar during that time, but growth in imports lead to a depletion in Pakistan’s foreign exchange reserves and put more pressure on the currency. But since Dar left the country, and as he is unlikely to return soon due to the threat of corruption charges, Prime Minister Shahid Khaqan Abbasi has stepped in to tackle this issue. After consulting with the IMF, the rupee is now being allowed to “adjust to market conditions,” which resulted in the rupee weakening slightly to 107 to the dollar on Friday. A weakened rupee will now allow the central bank to begin rebuilding its foreign reserves through sukuk and bonds, and boost exports, especially textiles, which have been in decline for four years.
The devaluation will not solve everything troubling Pakistan’s economy. Dar’s previous policy of propping up the country’s foreign reserves with cheap international credit will still need to be paid for, and with a weakened rupee it will be even more expensive. Former prime minister Nawaz Sharif’s government obtained $35 billion (Dh128.5 billion) in new loans during his four-year tenure. Repayments must start in 2018. While there was never going to be an easy fix for Pakistan’s economic ills, brought on by Sharif and Dar, this was a critical step that will allow the economy to begin to heal.
