The economy seeks certainty

The rupee is in trouble again over renewed political uncertainty, and no assurances from the government and the central bank seem adequate to convince the markets otherwise – not even last week’s proclamation of victory over a looming threat of default on external obligations. It retreated further in the interbank market on Wednesday and traded at around Rs225. The open market rate soared even higher, touching Rs227. There is no denying that the dollar is soaring against most major currencies, including the basket of currencies Pakistan trades in. But this should not blind us to the fact that the rupee’s slide has been much steeper. This unbridled depreciation of the rupee has unleashed a price inflation the likes of which Pakistanis have never seen. The finance minister may be interested in knowing that people are barely breathing under the brunt of this inflation. We are fast gravitating towards a situation ripe for political upheaval.

No time for complacency

This is no time to be complacent on the back of the rather meagre lifeline the IMF has agreed to throw at Pakistan once its executive board puts its seal of approval on it sometime this August. The $1.17 billion expected to be disbursed in late August at the earliest cannot get us very far. Our import bill for the month of July 2021 is set to tally in at somewhere between $5 billion and $6 billion. Which means our forex reserves are barely enough to cover two months of imports. Pakistan’s financing needs over the current fiscal are projected to be in the vicinity of $35 billion taking into account the country’s debt servicing and current account support, while our inflows total to no more than $31 billion even after figuring in the EFF and other friendly countries. This translates to a financing gap to the tune of $4 billion – which again exerts pressure on the rupee. The Fund is seeking assurances from Saudi authorities that they will deliver on their promise to lend Pakistan $4 billion before the disbursement of funding in the pipeline.

Forget subsidies, please

The root cause of our problem is our narrow and limited export base, making our exports both puny compared with our imports and unresponsive to currency devaluations – not least because a large part of our export industry’s inputs are imported. This is why any growth in imports leads to an equal growth in our current account deficit. Workers remittances have been on the upswing lately but nobody should expect this inflow to offset our entire import bill. The upshot is that any currency depreciation puts our economy in a vicious cycle. The government and the central bank have a shared duty to break this vicious cycle. This clearly means curbing imports is the only way we can curb CAD. How the authorities go about it is up to them. In no case can they afford to subsidize imports.

Political volatility

Another thing the government may want to pay attention to is political volatility. The markets like to know the government is securely in place and firmly in control. The recent slide of the rupee clearly means the markets are anxious over the political situation. The government, having the benefit of the collective wisdom of several top political parties of the country, should know how to signal political stability – and it must start sending out those signals now. In particular, it must take solid measures to stem the political negativity some quarters seem intent on spreading. The State Bank of Pakistan is welcome to explain the nuts and bolts of a free-floating currency in its spare time, but its core function remains bringing sanity to the chaotic marketplace. Though the central bank cannot really be blamed for its failure to act in support of the rupee when our forex reserves are as flimsy as they are. It does not help that some of the inflows projected by the central bank are not materializing – or keeping well below levels considered normal – all because of the prevailing political uncertainty. Exporters are not repatriating their revenues at the expected rate. Other private inflows have almost dried up. Remittances are also starting to somewhat waver. In other words, dollar inflows are dwindling, putting further pressure on the rupee.

Radical solutions

A lifting of the pall of political uncertainty may help reverse these trends, but nothing is certain right now. This has rendered the SBP into a silent spectator of the rupee’s battering – an alarming situation to say the least, especially when we know this precisely was Sri Lanka’s situation two months before it went into default. As of now, Pakistan stands at number four on the list of countries with the highest default risk in 2022, but there is no telling when we will rise on the Visual Capitalist’s list and by how much. With these hairy monsters haunting Pakistan’s internal and external finances and the central bank hobbled, the only remaining option is action by the government, the urgency of which cannot be overemphasized. Radical situations call for radical solutions. What can the finance ministry do to curb the demand for the dollar? Can it curb imports or seek to curb consumption in some other way? Should Pakistan return to a closed economy like the 90s, abandoning its free-market pretensions? Or should the country banish the central bank and move to a currency board regime – as Professor Steve Hanke has been advocating for some time?