Why Pakistan’s currency points to bigger issues

Pakistan’s official currency is having a hard time. The rupee continues to fall against the dollar and its tumbles are now sending shock waves across the economic board. The currency has lost so much of its value in the last four months, plummeting from 152 to a dollar to the current 173 that the experts are calling this the steepest fall in one span of time in the recorded history since the currency was linked to the dollar in the early eighties.

In the last three years that slippages of the rupee have been even more striking. It was around 92 to a dollar in 2017 but then the financial managers of the country were accused of holding it up artificially through means that more administrative than financially prudent.

It was allowed to reach its natural equilibrium through a raft of policy measures and it seemed to settle down to a little over a hundred for a few months. But since it has been sliding despite interventions from the State Bank of Pakistan.

Downhill ride of the rupee

Now international assessments suggest that the downhill ride of the rupee will not see a stable station in the coming months and there is more shedding on the cards. Fitch has revised its evaluation of the rupee and is forecasting the currency to go to somewhere between 180 to a dollar in the next year.

One view is that there is nothing extraordinary about these developments. Experts document the slicing of the rupee along political lines and point out how under different governments that situation has remained roughly the same. Dr Furrukh Saleem, an economic analyst once briefly associated with the present government, gave the following statistics in his recent piece in a local newspaper.

He wrote that over the 5-year period beginning in 2008, the Pakistani rupee lost 20 per cent of its value against the dollar. Over the 5-year PML period beginning in 2013, the Pakistani rupee lost 26 per cent of its value against the dollar. Over the 37-month period beginning in 2018, the Pakistani rupee has lost 36 per cent of its value against the dollar.

This points to structural issues related to the imbalance in imports and exports. Whenever imports outstrip exports the demand on the dollar goes high, the supplies run short and the rupee takes the hit. The same thing is happening even these days.

Highest gaps in imports and exports

Pakistan has recorded one of its highest gaps in imports and exports in recent times making dollars a precious commodity hotly sought by the importers. Other factors are at work too. The US monetary policy is tighter now than before and its inflation rate is lower than Pakistan’s, which has inflation hovering 10 per cent.

Regional developments too are to be blamed for the rupee fall. Afghanistan is sucking dollars out of Pakistan’s market as ungoverned space between the two countries allow illicit movement of the currency.

Vagaries of the rupee

No matter how much dollar does the State Bank float in the market to stabilise the situation they are all soaked up by those who deal in currency underhand. Local market forces unleashed by the fall of the rupee and rush for the dollar are also at work. Retaining savings in dollars is a cushion against inflation and a protection against the vagaries of the rupee.

There are costs attached to the falling fate of the rupee. Take debt for instance. Reports say that the rupee depreciation alone has added Rs2.9 trillion to the public debt of the country. As foreign debts have to be paid in dollars that trouncing of the rupee is not a happy news for a country strapped for forex reserves.

There are prestige issues as well. Seven months, ago the rupee was the best performing currency in Asia. Now it is the worst of the whole lot.

Currency devaluation isn’t a bad thing if it could spur exports. That has not happened so far. While the exports have risen, the imports have far outstripped them leaving the rupee reeling.

Stabilising the national currency and letting it come closer to its real value is an important economic goal. The state of the rupee is telltale sign that Pakistan’s road to economic sustained recovery is a long and winding one.

Syed Talat Hussain is a prominent Pakistani journalist and writer. Twitter: @TalatHussain12