The currency weakening rumours strengthen with Dar’s weakening political health. Few months back when Dar was too busy handling JIT, currency depreciated by 3 percent in a go. But the move was hollow, as it came back and has been sticking around Rs105 per USD since.
Rumours of Dar not coming back and sharp depreciation of the currency are in full swing. One may wonder if the currency is pegged to Dar’s physical and political health. Yes, the currency is being artificially pegged to USD since 2014. Many regional economies have depreciated their respective currencies all this while. Exports have become expensive and imports cheaper, to worsen the trade and current account balances. But don’t mention currency depreciation.
BR Research has repeatedly commented on the artificial peg of PKR against USD and advocated to depreciate the currency slowly to avoid any knee jerk reaction. Any sudden depreciation of say 10 percent or more is detrimental for an economy which heavily relies on imports for day to day running.
Sharp fall in currency would again push the economy on a slow growth and high inflation era and it would take years of stabilization policies to bring it back on track of five percent plus growth. The prime reason BR research has been stressing upon gradual adjustment of currency is to avoid an inevitable sudden shock. The good news is that there is a room to smoothly adjust currency and interest rates to avoid any catastrophe.
Coming back to the market rumours. The day Dar left for London, the noise of sudden depreciation is rampant - some are naively saying PKR125-130 is the right level; and opine that this is the solution to take the economy out of mess. It is a flawed way of thinking. The growth is five percent plus and is broad based. There are even signs of recovery in exports. Similarly, fresh wave of duties on import and some increase in petroleum prices may marginally decline imports growth too.
Yet, the current account deficit would remain high and challenge the fall in reserves. However, overall reserves are covering 4.6 months of imports (SBP reserves: 3.2 months of imports) in 1QFY18. Unlike today, in 1QF09, when Pakistan entered the IMF programme and the currency was depreciated by 24 percent (from Apr08-Sep08), the import cover was mere 2.4 months (1.4 months of SBP reserves). There is no immediate crisis and need to run to the IMF. Why preempt a shock and take economy back to low growth? Why make millions unemployed?
Yes, the recent Egypt experience of sharp currency depreciation eventually comes well for the economy while the commentators thought otherwise, initially. Yes, Pakistan needs to learn from Egypt experience, where structural reforms played a greater role than currency depreciation in jacking up growth. Hence, one cannot completely discount the depreciation argument.
All said, opinions of policymakers matter the most. PM Abbasi and Miftah Ismail are at the helm of affairs in Dars' absence. Both are indicating that currency adjustment is imperative for averting any crisis, and they may go for adjustment in coming days or weeks. But anything beyond 5 percent in a go would not be a wise move. It’s better to take the rupee dollar parity to around 110 and see how the economy reacts, while having a close look on international commodity prices, especially oil, and tread accordingly.
In the meantime, concentrate on making exports package effective - let the refunds and other payments route through SBP without any delays. Go with the plan of hitting global debt market in November to fetch at least $2 billion from issuance of Euro bond and Sukuk. The need is to go to China and other economies to lure them for more FDI.
Concurrently, it’s good to curb non-essential imports; however, the need is to realize that imports are not bad as whenever the economy grows over five percent, imports are bound to increase. The need is to focus on exports; and sudden currency depreciation is not the answer to exports' woes!
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