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Amidst rising political temperatures in the country in the wake of Panamagate scandal, an unusual development took place in the country’s currency market last week.
The rupee all of a sudden shed 3.1 percent in single day trading, sending shockwaves through the government’s economic management team, particularly finance minister Ishaq Dar.
In the interbank trading on Wednesday, the rupee fell to 108.25 from 104.90 for a dollar.
The plunge took place on the day when Maryam Nawaz, the daughter of the prime minister and his political heir, made her high profile appearance before the joint investigation team (JIT) probing allegations of money laundering against the ruling family.
The devaluation, as expected, drew strong reaction from the finance minister who suspected that speculators in collusion with certain bank and entities tried to take advantage of the political uncertainty in the country and manoeuvred the move to maximise their profits.
He dismissed the slump as “artificial” and promised action against those responsible for it.
But it seems the finance ministry issued the statement without consulting the central bank as to actually what has happened.
Shortly afterwards, the State Bank of Pakistan issued its own statement that was in total conflict with the stance of the finance minister.
The central bank supported the devaluation and maintained that it would help strengthen the growth prospects of the country and contain the current account deficit and which is expected to hover around 10.7 billion dollars for the entire fiscal year 2016-17 that ended on June 30.
“SBP believes that the current exchange rate is broadly aligned with the economic fundamentals,” according to the statement from the central bank.
The next day, on Thursday, the finance minister summoned the heads of the banks to Islamabad and at a news conference and criticised the central bank for allowing the local currency to fall.
The minister said he initially thought that the devaluation might have been caused by the political situation of the country but his subsequent checks with the authorities in the central bank as well as currency markets revealed that it was caused by some “communication gap”.
What prompted the central bank to allow devaluation of the rupee is to be probed, but the move has proved that government and the state banks are poles apart over the value of the local currency.
The government apparently thought that the absence of the permanent governor of the central bank was the main reasons behind the “communication gap” and hence appointed the former chairman of the Federal Board of Revenue and a close confidante of the finance minister as the governor of the State Bank of Pakistan (SBP).
Many analysts believed that the devaluation of the rupee was a long overdue move as it could help boost declining exports of the country.
SBP, as well as international financial institutions, particularly the International Monetary Fund (IMF), in their recent reports and statements have made it clear to the government that growing current account deficit was one of the main challenges confronting the economy of the country.
They have warned that the macroeconomic gains made over the past four years could be wiped off if the government did not take measures to bring down external deficit and address other challenges.
Rising imports and declining exports are the main reasons for the burgeoning current account deficit.
Though there are many reasons for the decline in the Pakistani exports, Pakistani exporters have long been complaining that the overvalued rupee was one of the reasons behind this fall.
The exporters as well as Pakistan’s donors have long been calling on the government to allow devaluation of rupee, which according to the IMF estimates was is 20 percent overvalued, but the government has dismissed such calls, fearing that it could result in the increase in inflation which it has maintained at a low level.
Analysts say devaluation of rupee, which would spur inflation, is politically very risky for the government at this stage as it is already facing tremendous pressure from the opposition over the Panamagate scandal.
An increase in inflation could trigger a political backlash from the people which the government could not afford when it is heading towards general elections.
But analysts warn that increasing current account deficit entails much more serious risks for the economy of the country. They urge the government to take some measures to address this problem, failing which it would have to resort to more borrowing that would further pile up the debt burden on the country.
Dr Ashfaque Hasan Khan, a renowned economic expert and a long-time critic of the government’s economic management strategy, supported the central bank move to devalue the rupee to stem unabated rise in the current account deficit.
“I think the state bank has taken the right decision and I fully back it. Mr Riaz Riazuddin (the acting governor of the central bank) took the right decision.”
Moreover, he said the state bank has virtually been reduced as a subservient body to the finance ministry while throughout the world it acts as an autonomous body which takes its decisions independently and freely.
“We have been calling on the government to make the State Bank an autonomous body and this action of the bank was aimed at asserting its autonomy,” he added.
He also differed with the finance minister that the central bank should have nothing to do with the current account deficit of the country and it is the responsibility of the government to tackle these issues.
“The monetary policy, exchange rate etc are the exclusive domain of the central bank,” he added.
However, Dr Shahid Hasan Siddiqui, another renowned economist, said the central bank should have taken the finance ministry into confidence before making such intervention to devalue the rupee.
“This issue needs to be thoroughly probed.”
It was not the first time that Pakistani currency was devalued in such a strange manner. In 2008, the rupee was depreciated when Shaukat Tareen was finance minister, he recalled.
The then government had promised it would look into the reasons as to why the rupee was devalued suddenly, but it was never probed and he doubted it would be probed this time.
Moreover, Siddiqui said the exports of the country could not be increased by just depreciating the rupee.
“In my view, the State Bank assertion that devaluation is necessary to contain growing external deficit is an absurd contention,” he said, and added, “other measures like value-addition, containment of budget deficit, etc, should also be taken to make our exports more competitive in the international market.”
Observers say in view of the growing political uncertainty all stakeholders are required to act prudently in order to minimise the negative impact of this situation on the economy of the country.
They believe that the primary responsibility in this regard rests on the government.
There is growing anxiety among the private investors, particularly the foreigners, over the outcome of JIT investigations into the allegations against the Sharif family.
Sindh governor Mohammad Zubair, who has also served as minister for privatisation in the current government, has rightfully tried recently to assuage the concerns of the business community by saying that heavens would not fall on July 10 (today) when the JIT would submit its final report to the Supreme Court.
A wrong impression is being given as the apex court would take some quick decision on the fate of the government soon after submission of the report.
Though the report, which is likely to be made public, would set the future course of action with regard to the government, analysts say even if the report goes against the Sharif family, it does not necessarily mean that the government would be sent packing.
Analysts said the government leaders, particularly the finance minister, need to take the business community into confidence over the political situation of the country.
Ironically, observers, say the finance minister, who is known for his cool temperament, in recent days has himself made fiery statements with regard to the political situation of the country. They point out to his angry outbursts at the news conference last week after his appearance before the JIT.
The finance minister himself had upped the ante and warned against negative impact of the political situation of the country on the economy and had urged the political parties to evolve a charter of economy.
Ishaq Dar since the inception of the present government has not only served as its finance minister, but also acted as the main political trouble-shooter for the government.
He attends almost all political meetings with the prime minister and has also been the lead negotiator with the political parties on behalf of the government on political issues.
In view of rising political temperature in the country, one wonders if Mr Dar would be able to concentrate on the economic matters of Pakistan.
The political tensions are likely to exacerbate in the days to come irrespective of the outcome of the JIT report.
Tehreek-e-Insaf, led by Imran Khan, has already indicated that it would hit the streets if the ruling party tried to create political unrest in case of adverse findings of the JIT.
Economy is feared will be the main victim of any political turmoil. Pakistan’s economy had already borne the negative results of the political turmoil a decade ago when all economic gains were lost in a span of just a year or so when lawyers and opposition parties agitated to topple military president Pervez Musharraf after he imposed emergency rule in the country.
The country can ill-afford the repeat of what had happened in 2007-08, but it all depends on the political leadership as well as other stakeholders to save the economy from another slump.
The writer is a senior journalist based in Islamabad
