Tumbling down

With the Pakistani rupee continuing to tumble in the international market, it is legitimate to wonder whether it is going to stabilise anytime soon. The Pak rupee was trading at Rs125 to a dollar on Friday before closing at Rs121.5, another fall of around three percent. The State Bank of Pakistan, thought to have been behind the last three rounds of rupee devaluation, has blamed ‘market forces.’ One would think that the highly qualified economists sitting in SBP can come up with a better explanation for why it seems to believe that this will be ‘good’ for the Pakistani economy. In the current climate, with Pakistan facing a balance of payments crisis soon, a weaker rupee could severely limit the country’s powers of economic recovery. The Pakistani rupee has fallen around 20 percent over the last eight months. We have commented before that it would have been better if any ‘readjustment’ decision was taken in a single stride. The ‘phased’ decline is creating fear in the domestic economy, leading to high levels of dollar buying by individuals looking to protect the value of their assets.

One of the great economic myths being peddled by economists defending the move is that of ‘actual value’ – or ‘market value.’ This would suggest that the fall in the value of the rupee is connected to some kind of demand-supply equilibrium. Since Pakistan needs more dollars to cover its fiscal deficit, therefore, the cost of buying dollars should increase. But currencies do not operate in single commodity markets – and their values are determined against a much larger set of currencies. Moreover, the simple fact that no one is disputing that the SBP is behind the decrease – and that the IMF and WB ordered it – should be enough to state that devaluation is a political decision. The question is whether this political decision will benefit the economy or make it worse. Speculating on the real value of a currency is a dangerous business. Money operates in the international currency market as a fictitious commodity. Its primary purpose is to facilitate the exchange of real commodities, not to operate as a commodity itself. Once a particular currency’s value is thought to be unstable, there is little to hold it back from a much larger collapse. One must wonder what would happen to the value of the rupee if Pakistan decides to negotiate another IMF bailout – or what would happen if Pakistan ends up defaulting on its international debt obligations in 2019. The tumble of the Pakistani rupee could only get worse.