More devaluation

After months of IMF prompting, it seems the Pakistani government has decided to devalue the Pakistani rupee a second time. In the second such intervention in four months, the Pakistani rupee fell around ten percent compared to the US dollar in a single day before recovering slightly. The situation raises concerns over the health of the country’s economy at a time when the balance of trade and current account deficit are being considered to put it in a particularly vulnerable situation. Despite denials by the government, the possibility of needing another bailout in the short term is very real. It barely helps the credibility of the country’s macroeconomic claims if its currency continues to fall amidst higher economic growth. The State Bank of Pakistan has tried to pass the buck by claiming that the rupee collapse was a ‘market-driven’ event but this was quickly refuted by currency traders who said the SBP withdrew support for the rupee in market operations. This is what triggered the spiral downwards of the currency. The move itself had been expected but a sudden fall is never a healthy event for an economy.

Currency valuations are a tricky business. Pakistan has continued to operate on a heavily managed system to keep the currency at a certain value. The SBP remains the key actor in influencing exchange rate, and has admitted that payment pressures played a role. But the central bank needs to state much more clearly what it plans to do. Such interventions in the market should be planned, instead of coming as sudden jerks. However, according to Advisor to the PM on the Economy Miftah Ismail, the move was planned; he has also said that the government would attempt to keep the exchange rate stable around Rs115 per US dollar. The larger issue the country faces – that of high imports – is being connected to CPEC-related investments. This is a tricky place. If Pakistan will have to seek a bailout to keep CPEC going without reaping any benefits, this is something we need to think about more seriously. Moreover, Pakistan already has a high cost of importing oil, which is only going to get worse with a higher exchange rate. Exports remain in a tricky place. Imports continue to be high. And remittances mostly stable. The PPP has already attacked the PML-N for creating an artificial ‘Ishaq Dar economy’ and blamed the government for ‘bringing the country to the verge of financial collapse.’ Devaluing the rupee does not seem the obvious solution but Pakistan has been unable to set an independent economic policy for decades under IMF influence. For now, all we have is hope that the IMF and government know what they are doing.