This month witnessed sharp volatility in the value of Pakistani currency which weakened by almost 5 percent and traded at PKR 121 to a US dollar. This happened at a time when just days before the outgoing Finance Minister had claimed that there is no need for any further devaluation. Even the Governor Central Bank is on record to have said that the currency was trading near its true equilibrium value and will not see any wide changes.
This clearly demonstrates that the public at large was misled regarding the true picture of the economy. The widening trade and fiscal deficit has increased the borrowing appetite of the government not only to support the balance of payments but also to fund its own growing administrative losses. In the case of trade balance, the previous two rounds of devaluation, regulatory duties and cash margin requirements proved inadequate to significantly curtail the growth of imports. The high-end retail shelves are filled with all types of imported exotic foods, cosmetics, smartphones and accessories. The automobile showrooms have blossomed on the back of elite’s demand for imported German and Japanese cars. Little did we know that liberalizing private consumption of our elites will end up reducing purchasing power of the poorest of the poor who are now set to see higher levels of inflation.
Artificially holding the rupee at a certain unrealistic exchange rate was never a good idea. The outgoing government should have let the currency find its true value much earlier; allowing an easier adjustment for the people of Pakistan. What happens now is that exports may see a short term increase if only Pakistan is able to provide economical and timely energy supplies to industry. Remittances through formal channels may also increase to some extent. On the negative side, the increasing crude oil prices in the international market coupled with rupee’s devaluation could increase the energy import bill in value terms in turn testing the country’s capacity to fund increased energy demand. The devaluation will also promote long term inflation due to higher burden of already procured debt and its repayments.
Final point here is that the interim government should remain transparent in the ongoing negotiations for short term debt which is bring procured from China to help stabilize the currency. The terms should be known to the public at large which ultimately has to repay this loan.
Dr. Vaqar Ahmed is joint executive director of the Sustainable Development Policy Institute, Pakistan. Twitter: @vaqarahmed
Published in Daily Times, June 20th 2018.