They say, with good reason, that finance is the measure of all things; especially in government. For if any government in any corner of the globe is sitting on top of a healthy pile of reserves, it sits comfortably and, other things remaining the same, is able to create conditions that enable the average Joe to live well.
This phenomenon could go a long way in explaining the ruling Pakistan Tehreek e Insaf’s (PTI’s) change of fortunes of sorts lately. It’s no coincidence, looking from the vantage point of the market, that the party is on the ascent and finally winning important elections and by-elections. Because after throwing everything including the kitchen sink at the economy to try and turn it around, it has now achieved more than a fair degree of success, at least as far as some of the more fundamental indicators are concerned.
Exports might still be below the ideal number that would make us forget all our deficit worries, but they still clocked in at around $25 billion last fiscal (up from $23.2 billion in FY2018) – the highest on record. Both textile exports ($15.4b in FY21 against $13.5b in FY18) and IT exports ($2.12b in FY21 against $1.06b in FY18) are on a healthy, upward trajectory. Remittances have also broken all records, settling at $29.4 billion in FY21 versus $19.9 billion in FY18. It’s true that travel restrictions caused by the pandemic played a big part in this, but it is also true that the ruling party has been pushing to streamline international money transfer channels from the day it came to power and has achieved at least a little degree of success in that regard.
Yet, for all the successes, it is something of a dilemma that the rupee has taken a nosedive over the last few months. When the government granted complete sovereignty to the central bank and the SBP in turn decided to let the rupee float, it had factored in the plunge that came immediately afterwards.
The reason was that the previous PML-N government had artificially kept the rupee more or less pegged to around Rs100 to the dollar. And considering that the rupee depreciates about five percent against the dollar annually, keeping it static for a while tends to make it snap back towards its fair value once currency controls are lifted. Something very similar happened when the Shaukat Aziz-led finance team kept the rupee frozen towards the end of their tenure, and the next PPP government got grilled in the press as the local currency fell back into place later.
Yet the downward slide has resumed lately and the rupee has lost a good eight percent of its value since 12 May, when it last peaked against the dollar, till the market closed last Friday. The overall move has been from around Rs150 to Rs163 versus the greenback. Ordinarily text books would expect exports to pick up with depreciation of the currency. But even a 40 percent or so collapse of the rupee over the last few years brought barely a couple of percentage points to exports. So that part cannot be counted on. And since imports will become more expensive this phenomenon will definitely feed into the current account deficit. Also, despite all sorts of promises of free float, the central bank is still quite clearly stepping in to keep the rupee from moving too far past the Rs160 mark.
So what is really going on? Perhaps the state bank should step in and explain things before investors let their fantasies, fueled by conspiracy theories that are a dime a dozen in the present environment, run wild. Could it be that the few stats that are not looking too well are making this happen? Inflation was still pretty high with an 8.4pc year-on-year jump this July, on top of a 9.7pc rise in June. Even core inflation, which excludes food and petroleum prices, was 6.8 percent. That no doubt played a role in lowering the benchmark interest rate to only seven percent when the whole world was racing towards near zero rates to snap out of the global recession.
And since that makes our interest rate higher than others, especially in the region, could it be that international bargain hunters and carry traders were skimming interest differential earnings by leveraging themselves to the hilt and buying our currency? Surely that would explain how it suddenly bloated about 17.5 percent from its last major bottom in end-August 2020, at around Rs168.5 to a dollar, to Rs151 at the May peak. If that is true, could the reversal mean that most investors have made their quick bucks and are now headed for the safety of more reliable markets?
Such things could put our already fragile bond market under a lot of pressure. Already Pakistan’s debt equity, which includes sale of Pakistan Investment Bonds (PIBs), treasury bills, sukuk/Eurobonds and requires payment of interest in addition to the principal on maturity, has ballooned from Rs16.5 trillion three years ago to more than Rs25 trillion now.
If the rupee’s sanctity cannot be preserved, such instruments could come under a lot of pressure very quickly. Countries like Turkey have already learned such lessons the hard way and there’s no need for us to repeat their experiences. Hopefully SBP will shed light on the matter and settle all doubts sooner rather than later.