Pakistan’s financial markets are experiencing a renewed meltdown under the caretaker setup, and it is immediately clear that caretaker Prime Minister Anwar ul Haq Kakar and his economic team are out of their depth dealing with the unfolding catastrophe. Thursday saw the greenback rise by Rs1.09 at the interbank, closing Rs305.54, stacking up its gains under the caretaker government to Rs17.05. The open market losses incurred by the local currency are even steeper: on Thursday, the dollar surged by Rs3.50, trading at Rs326. The rupee’s cumulative losses against the greenback in the open market under the caretaker government tally to Rs30. The bullion market has taken a similar trajectory, with gold price surging by Rs3,400 per tola on Thursday itself, to reach Rs239,800 per tola – merely Rs200 shy of the all-time high of Rs240,000 per tola recorded in May 2023. Small wonder the bourse is in a tailspin, the PSX benchmark index losing 1242.1 points or 2.69 per cent of its value on Thursday to close at 45,002.41.
Clearly, the markets are taking a dim view of the unfolding political situation with uncertainty about the next general election on the rise. But that is not all; a key reason for the rupee’s increasing weakness is the government’s move to lift administrative curbs on imports placed under former prime minister Shehbaz Sharif. Given the structure of Pakistan’s economy, this was a major decision that could not fail to undermine the rupee without adequate forex provisioning to offset the higher dollar outflows. What’s more, it must be said that Pakistan’s agreement to anchor the rupee’s official exchange rate with the open market has spectacularly backfired, basically because of how strong the black and gray markets are. Any serious move to make this arrangement a success would inevitably include a strict crackdown on smuggling and hundi/hawala channels that are a major and perpetual drain on the country’s hard currency reserves.
The drift is that while Pakistan is bound by a covenant with the IMF to keep its exchange rate pegged to the open market rates, nothing stops the government from taking administrative measures to plug the holes that enable hard currency flows out of the economy and into the black market through smuggling rings operating through Iran and Afghanistan. Once the caretaker government failed on that count, the rupee’s slide was a given, leading investors to park their funds in bullion and hard currencies and encouraging expats to use hundi and hawala. This set off a vicious cycle further undermining the rupee, pushing inflation higher and higher, and turning the effective interest rate on local currency negative. Soon enough, the central bank will be forced to further hike its policy rate in the hope of anchoring inflation, fueling the vicious cycle and further worsening the situation.
All the while, the caretaker government has appeared frozen in inaction. If that was not enough of a mess, the caretaker government broadcast its cluelessness and impotence in terms of economic decision-making by taking up the issue of exorbitant electricity bills – and dropping it like a hot potato. Looking back, it is a marvel why the government is not adequately schooled in timely political messaging to create an impression of being in control. Equally, it is mind-boggling how the caretaker PM could fail to put in place an economic team that can make cogent decisions and inspire confidence among investors. The need for rigorous economic policy stewardship was evident enough – especially with the fate of the $3 billion IMF bailout hanging in balance – before Kakar and co arrived on the scene. Sadly, however, they have been tested and found wanting. If and how swiftly they can fight back to regain control of the situation remains to be seen.