Caretaker setup shows lack of control over currency regime

LAHORE: The interim government’s seemingly lost control over the currency regime is being ignored, as all political parties are busy slinging mud on each other that is further damaging the already weak economy of Pakistan.

Rupee traded at Rs110 against dollar when the caretaker government was sworn in; however, in less than 50 days the value has dropped to Rs128.50 against greenback. It would have been better if the economic policies of the last elected government were not tinkered by the caretaker setup, and policy changes had been left to the next elected government.

The previous elected government kept the rupee value stable, more so when Ishaq Dar was the finance minister. Miftah Ismail did let the rupee adjust to a lower value against dollar, while keeping full control over the currency regime.

Now, the slide of rupee is continuing, while political parties are bickering and destroying the country’s image, instead of pressing the caretakers not to damage the economy. It is unfortunate that in politicking, the real economy is being ignored.

Though the caretaker setup seems to have loss control of the exchange rate regime, it will not be held accountable for its acts. Currency regulation is a very delicate matter and governments’ world over keep firm control on their currency value.

There is a global concept of free float of currency under which a currency attains its value as perceived by market forces. Most governments, including that of China and India, closely watch the movement of their currencies under free float regime.

Pakistan’s elected government was also doing that. In fact, all third world governments have been very watchful of global and domestic manipulators and speculators of currencies ever since the 1997 East Asia currency crisis. A single man (George Soros) brought East Asian economies to their knees through careful and well planned manipulation.

After that all developing economies, despite having open currency markets keep a close watch on their currency markets. They adjust their currency against dollar gradually keeping tight control on manipulators and speculators.

When the swings in value of a currency are very high, it benefits the manipulators. They may take the currency down in the evening and sell a large chunk of their dollar holding; and then they first start with mid-day adjust and finally to almost full recovery. At this time they buy back their dollars making billions in a day.

This happened a few days back in Pakistan when the dollar appreciated by Rs6.50 against the dollar to cross Rs128 barrier. The rupee recovered its value by 95 in the evening. In this speculative movement, some investors lost tons of money and some manipulators gained hefty amount.

The next day the rupee again opened above Rs128 against the dollar. Such manipulations occur when the state loses complete control over its currency.

We should appreciate that the previous government did maintain a control over rupee, which the caretaker regime lost. Such sharp decline in rupee value has created problems in the economy. The rupee is now in the hands of manipulators and instead of over value it is now grossly undervalued.