Good luck with the rupee

It’s one thing to admit that very crucial talks with the IMF (International Monetary Fund) have broken down for the time being, which implies that everything possible will still be done to revive them, but it’s quite another thing for front-page headlines to quote the advisor to PM on finance and revenue as saying that the talks are very much headed in the right direction. Such things are done as a matter of routine all over the world, though not quite often to this extent, to keep market confidence from tumbling.

And one thing that would have been on Shaukat Tarin’s mind is the reaction of the rupee to the news, since it was widely expected to push its way back up on momentum generated by the resumption of the Extended Fund Facility (EFF). Sure, the currency is the central bank’s domain, but it isn’t Dr Reza Baqir who has to worry about lubricating the prime minister’s many subsidy programmes that underpin the expansionary budget; which is already in jeopardy so long as the final decision on the bailout programme is not reached. Even the stock market broke trend and rose for the last two trading days of last week because it had priced in a green light from the Fund.

But now that what was expected to happen hasn’t happened, there isn’t much to hold the rupee even where it stands after practically going through the floor over the last five months. Decision about likely movement of the equity market is split at the moment, with fundamental and news cycle-driven analysts expecting yet more trauma and the more seasoned technical analysts preparing to go long as the market pendulum swings from fear to greed. Yet there’s nothing to suggest a turnaround in the money market on any sort of time horizon.

All technical indicators expect the rupee to remain firmly in the clench of market bears for the foreseeable future, or at least till the IMF turns the tap back on. This trajectory would, without a doubt, force the central bank to intervene once again and try and put some sort of floor under the currency. Already, the Bank has embarrassed itself by admitting that it threw money into the market to stabilize the local currency, not because it didn’t work but because it made so much noise about never doing this when it got its prized autonomy. Now it risks getting sucked into a cycle that the market knows only too well. The more the currency collapses, the more it needs the central bank to intervene; which, in turn, only sends more national reserves to Money Heaven with nothing at all to show for it.

Then there’s the dollar’s own strength to contend with. The reserve currency does have a life away from the rupee, after all, and the return of inflation to the US economy, along with the spike in 10-year Treasury yields, means that the Fed’s tapering would most likely commence from November and a rate hike might come sometime next fall. That is dollar-positive in the medium term, at least, even if the greenback’s safe haven appeal makes it lose ground against commodity-based currencies for a while whenever risk returns to the market, as is happening these days. When the dollar is rising across the board, there’s little hope for the rupee, which is backed by very weak fundamentals and persistent current account weakness, to regain even a little of its lost value.

Since it’s also pretty well known that rupee depreciation or even collapse does precious little for exports, while it bloats the import bill considerably - and ours is an economy where efforts to increase the former invariably increase the latter and that too to a much larger degree - persistent currency weakness is very much the finance ministry’s problem as well. Especially since it also substantially increases the dollar debt and puts Q-block on a much weaker footing.

One can only hope then that the finance advisor’s claims have some truth to them. And even if IMF negotiations are not exactly headed in the right direction, there is still a chance to salvage the programme. It’s not very likely that the Fund would really let us go under over a matter of some subsidies and taxes, which is what will ultimately happen if cuts its aid and other IFIs (international financial institutions) follow suit. It’s far more likely that it is counting on increasing desperation in Islamabad to extract yet more contractionary concessions with the economy circling the drain and little time left to do something about it.

Perhaps the one good thing that can come from all this is a reality check for the country’s economic managers. It wasn’t too long ago that Shaukat Tarin was oozing confidence as he stood IMF policy on its head, right in the middle of a bailout programme, and rolled out a bottom-top budget; very sure that he’d get the Fund to see things his way. Now he’s bending over backwards and willing to do a lot more just to keep the aid coming.

When there’s no life in your currency, which is a broad reflection of very poor fundamentals, you just can’t put your (fiscal) muscle where your mouth is, can you? Good luck with the rupee and, along with it, the economy as well as the ruling party’s chances in the next election.

Copyright Business Recorder, 2021