EDITORIAL: A news report probably sourced to the 25 August 2021 meeting of the Monetary and Fiscal Policies Coordination Board (MFPCB) chaired by Finance Minister Shaukat Tarin and attended, among others, by Governor State Bank of Pakistan (SBP) Dr Reza Baqir, reveals that 1.2 billion dollars was injected into the interbank market to stabilise the rupee – an amount that was clearly inadequate as the rupee continues to depreciate – from a high of 153 rupees to the dollar in May to 169 rupees on 14 September 2021. The 16 rupee decline in three and a half months (June to mid-September) is projected to increase the budgeted debt servicing by 1.6 trillion rupees given that each rupee loss vis-a-vis the dollar raises the servicing costs by about 100 billion rupees.
The question by independent economists is not why the SBP decided to throw good money, 1.2 billion dollars, after bad given the outcome but why the SBP stopped well short of injecting sufficient dollars to make a difference given its historically high foreign exchange reserves of 20 billion dollars? The answer may well be the yet to be scheduled sixth review with the International Monetary Fund (IMF) though the Fund claims that talks with the authorities is a continuous process while the authorities claim that talks specifically on the review will be scheduled for later this month. The sixth review, if successfully concluded, would lead to not only the disbursement of the next tranche but, more importantly, a reengagement with other international donors as their comfort level with respect to Pakistan’s pledge to structural reforms will rise, that in turn, may also reduce the current high cost of external borrowing/debt equity. The Roshan Digital Account, for example, has generated around 2 billion dollars and targets patriotism of overseas Pakistanis/resident Pakistanis with foreign accounts but at a cost of a rate of return more than triple what is on offer by most other countries. In the event that the IMF talks are unsuccessful on the review for the second time, attributed the first time due to the government taking an inflexible position on implementing the agreed time-bound conditions and structural adjustments as noted in the second to the fifth review dated February 2021, the country would become solely dependent on “friendly” countries for assistance.
The SBP has calculated a real effective exchange rate of around 99 in July this year, mitigating any demand for a rupee appreciation, and a core inflation of under 6.3 percent in August, the rate to which the discount rate is linked, enabling it to keep the discount rate at 7 percent. In other words, the SBP has absolved itself of any responsibility for the eroding rupee. The eroding rupee, however, may send a comfort level to the Fund in that the contractionary monetary policies agreed in the second to fifth review would be achieved by the massive rupee erosion and not require a raise in the discount rate.
The rupee depreciation is purely speculative, according to the Finance Minister. He, however, did not explain why it is eroding in spite of good fundamentals – on course to achieve a growth rate of over 5 percent, a historic rise in foreign exchange reserves, albeit more than 50 percent are debt-based, and a current account deficit that is, at least for the moment, not a source of concern. Shaukat Tarin’s recent press conferences and interviews reveal two disturbing elements: (i) the bottom-up approach (Ehsaas and its associated programmes including food subsidies and interest-free loans to farmers and small and medium enterprises) and the top-down approach (incentives to the large-scale manufacturing sector/exporters), both costing the economy more than a trillion rupees; and rising debt servicing due to an eroding rupee; and (ii) a resource base that simply does not have the elasticity to meet these budgeted and unbudgeted costs even if one assumes that the projected revenue target would be achieved.
There is, therefore, an urgent need to slash current expenditure which has been rising at an alarming rate during the ongoing tenure of the PTI administration, a rise that has not been arrested in the current budget which, as noted above, understates the debt servicing by over 1.6 trillion rupees due to the rupee erosion. The slide of rupee was expected owing to some plausible reasons, it is highly disappointing nevertheless.
Copyright Business Recorder, 2021
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