Background: In 1947, a US dollar was worth Rs3.31. Fast forward. During the PPP’s five years in government, the rupee lost 20 percent of its value. During the PML-N’s five years in government, the rupee lost an additional 26 percent of its value. During the PTI’s 37 months in government, the rupee has already lost 40 percent of its value.
Causes: The combined July-August imports stood at $12 billion. That is unprecedented. The combined July-August trade deficit stood at $7.5 billion. That also is unprecedented. Imports are going through the roof, and our exports of $31 billion in 2021 are almost the same as our exports in 2013 ($30.699 billion). There is just too much downward pressure on the rupee. Foreign exchange dealers insist that after the Taliban takeover in Afghanistan, roughly $5 million to $10 million have been flowing out of Pakistan into Afghanistan – thus creating more demand for dollars.
Uncertainty is the biggest enemy of businesses around the world. Look at the uncertainties circling Pakistan: a ‘reassessment’ by the US, a review by the FATF, a possible suspension by the IMF, gross external financial requirement of $29 billion, and the political situation in Afghanistan.
On a more technical basis, the rate of inflation in Pakistan is twice as high as it is in the US and the real rate of interest in Pakistan is in the negative (nominal rate of interest less inflation). Furthermore, foreign direct investment in Pakistan has dipped to a paltry $1.85 billion, and our ‘production potential’ relative to other economies is shrinking. Clearly, other economies are gaining advantage over the Pakistani economy and the rate of adoption of new technology is quite fast outside of Pakistan.
Impact: A new round of inflation. We import petrol, diesel, wheat, sugar, cotton, tea, lentils, chillies, fertiliser, machinery, iron, steel, palm oil and paper. The prices of all these items are bound to go up. Technically, devaluation ought to make our exports cheaper, but the problem here is that most of our exports are at least 60 percent import-dependent. Technically, devaluation ought to discourage imports, but the problem here is that most of our big-ticket imports are price inelastic (a price change has not much of an effect on demand).
Solutions: Over the short-term, the State Bank of Pakistan (SBP) can raise the rate of interest to support the rupee. Over the past three months, the SBP has already spent $1.2 billion to support the rupee but to little avail. Over the long-term, there’s no way out but to reform our entire economic infrastructure. We need to break the cartels – electricity, sugar, fertiliser and automotive. We need competition. We need to get rid of loss-making state-owned enterprises (Rs2 trillion loss so far). We need enterprises that are globally competitive. And, we need businesses that produce exportable surpluses. There’s no other way out.
Alarm bell 1: Investors don’t invest in countries with unstable currencies. Alarm bell 2: Businesses adopt a wait-and-see attitude – that means unemployment. Alarm bell 3: Devaluation means Pakistanis are getting poorer by the day. Alarm bell 4: Devaluation means a higher rate of inflation. Alarm bell 5: Inflation means more poverty. Alarm bell 6: Poverty means hunger, and hunger means pain and crime. Yes, we have the potential to break this vicious cycle. But the political leadership must take the first step: reform the economy.
The writer is a columnist based in Islamabad.
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