Rupee to dollar

Muhammad Ishaq Dar, our 42nd finance minister, has prudently set his priorities: strengthening the rupee, reducing the rate of inflation and lowering the rate of interest. If the newly sworn-in finance minister’s past performance is something to go by then here’s the record: Ishaq Dar took oath of office on the 7th of June, 2013. The average exchange rate in 2013 was Rs101 to-a-dollar. Ishaq Dar’s last day in office was the 22nd of November, 2017. The average exchange rate in 2017 was Rs105 to-a-dollar.

If the newly sworn-in finance minister’s past performance is something to go by then here’s his record on inflation: in 2012, a year before Ishaq Dar took over as finance minister, the rate of inflation stood at 9.7 per cent. In 2015, two years after Ishaq Dar took over, the rate of inflation had nosedived to 2.5 per cent.

If the newly sworn-in finance minister’s past performance is something to go by then here’s his record on interest rates: in 2012, a year before Ishaq Dar took over as finance minister, the lending rate of interest in Pakistan was 13.5 per cent. In 2013, the year that Ishaq Dar took over as finance minister, the lending rate of interest had dropped to 12 per cent. By 2017, four years after Ishaq Dar took over, the lending rate of interest had dropped to a low of 8.2 per cent. Low interest rates do three things: stimulate economic activity, stimulate industrial activity and employment growth.

Fast forward to September 2022. On September 26, the rupee-dollar parity stood at Rs239 to-a-dollar. On September 27, Pakistan’s currency markets learned that Ishaq Dar was on his way back. The rupee strengthened to Rs233 to-a-dollar. On September 28, Ishaq Dar took oath of office for the fourth time. The rupee strengthened to Rs230 to-a-dollar. For the record, the rupee has strengthened by Rs9 in just four trading sessions. That also means that our foreign debt has gone down by Rs1.2 trillion (in rupee terms) in just four trading sessions.

Question: What is really happening here? Answer: It is the power of the message. No actual intervention, just the power of the message. There is empirical evidence that a “finance minister’s experience gained in office and his political experience have an impact.”

Yes, Ishaq Dar has scared away ‘currency speculators’ in the open market and ‘currency manipulators’ in the interbank market. Ishaq Dar has successfully engaged both speculators and manipulators in a strategic interaction. The Bangladesh Bank recently ordered “six banks to remove treasury chiefs amid the dollar crisis.”

Finance ministers around the world have two policy instruments for foreign exchange intervention: exchange rate communication and actual intervention. As per the European Central Bank (Working Paper Series), “Oral interventions are found to be substantially more effective…. They also tend to reduce market volatility whereas actual interventions raise volatility.”

To be certain, what worked in 2017 may not work in 2022. To devalue or to defend? The Reserve Bank of India, in a failed attempt to defend the falling Indian rupee, has lost $100 billion just over the past year.

The writer is a columnist based in Islamabad. He tweets @saleemfarrukh and can be reached at: farrukh15@hotmail.com