EDITORIAL: The budget finalized sometime in May 2021 projected the rupee-dollar parity at 153, a rate over and above the average May parity of 152 rupees to the dollar, while today the rupee to dollar parity rate is above 160, implying thereby the following key budgetary projections have been rendered invalid in the first month of the current fiscal year: (i) a rise in interest payments on foreign debt and on debt equity (including Eurobonds/sukuk) noted in rupee terms in the budget. Pakistan’s total external loans are in excess of 118 billion dollars today – with around 17 billion dollars incurred during the three years of the Khan administration to pay interest on loans as well as principal as and when due by previous administrations (with a deferral for one year granted by G-7 under the debt relief initiative for 2020-21 to assist indebted countries cope with the coronavirus) while 5 billion dollars was borrowed to meet its budgeted expenditures; (ii) the cost of imports in rupee terms has risen though critical imports including petroleum and products and cooking oil cannot be curtailed which in turn necessitates subsidies that in turn increases the budget deficit, a highly inflationary policy. In addition, machinery and raw material imports designed to increase overall exports are likely to be curtailed as the rupee erodes in value, as happened between May 2019 when the staff-level agreement was signed with the International Monetary Fund till the onset of Covid-19 in March 2020, with a consequent impact on productivity and employment opportunities; and (iii) while economic theory dictates a positive outcome of a currency erosion is higher exports; however, unfortunately, full realization of this benefit does not accrue in Pakistan as has been historically evident. In 2019-20 too, exports did rise in the aftermath of massive rupee erosion during the pre-Covid-19 period with July-June 2020 exports of 22.5 billion dollars to 25.6 billion dollars July-June 2021 – a rise of nearly 14 percent – yet one cannot and should not discount the diversion of orders from Covid-hit India and Bangladesh to Pakistan last year.
The trade deficit has risen from 24 billion dollars in 2020 to 30 billion dollars end-June 2021; however, the current account deficit improved from negative 4.4 billion dollars July-June 2020 to negative 1.8 billion dollars July-June 2021 – neither figure can be a source of immediate concern to the authorities and nor can the distinct possibility of its continued rise be cited as the reason for the ongoing rupee erosion.
The question is what are the factors responsible for the rupee erosion during June and July 2021 – a decline of nearly 5 percent? It cannot be the foreign exchange reserves as they have risen to 18.7 billion dollars July-June 2021, a historic high and even though more than 50 percent are from debt including swap arrangements yet this is clearly not factored in to determine the rupee value. Remittance inflows, a desired form of foreign exchange earnings second only to exports as their sustainability is dependent on policy decisions taken by foreign countries, have reached a historic high of over 29.3 billion dollars (compared to 23 billion dollars in fiscal year 2020) – a rise which the government claims reflects trust and faith in Prime Minister Imran Khan’s integrity and the trust that he enjoys with the Pakistani diaspora, while this may be true but this may also partly be due to the fact that hundi/hawala system has almost ceased due to lockdowns around the world. In other words, not sustainable but the rupee erosion today cannot be laid at the doorstep of projected lower remittances.
An explanation may be found in the second to fifth review documents uploaded by the IMF dated April 2021 but negotiations were completed in February 2021 which noted that: “going forward the authorities will continue to (i) use purchases in the FX interbank market to rebuild reserve buffers amid favourable market conditions but not to influence exchange rate trends; and (ii) limit sales to offset disorderly market conditions.” In response, the Pakistani authorities noted that “SBP’s interventions remain guided by market conditions and the objective of building foreign exchange reserve buffers. Forex sales are limited to preventing disorderly market conditions (DMCs) while not suppressing an underlying trend.”
There are many economists who question the relevance of our economic team’s claim in the four cobbled reviews arguing that perhaps SBP intervened in the market to enable the economy to better deal with the aftermath of Covid-19 post-March 2020 till May 2021 and that the ongoing erosion in June and July may be sourced to meeting one of the Fund’s major concerns for the sixth review scheduled for September 2021 (by the Fund) though reports indicate that the Ministry of Finance has yet to inform the Fund of the timeline of the review. Others ask for a firm definition of DMC, defined in theory as excessive volatility caused by order imbalances – an element that does not appear to be visible today. There is, therefore, an urgent need for the Finance Ministry to interact and explain the relevance of budget estimates and projections that have lost and are losing validity in view of erosion in the value of the rupee.
Copyright Business Recorder, 2021