EDITORIAL: A complicating factor in checking the continuing erosion of the Pakistani rupee, besides the inordinate delay in a positive conclusion of the sixth review talks with the IMF (International Monetary Fund) under its EFF programme and the delay in receipt of the promised three billion US dollars from Saudi Arabia, is the mid-August Taliban take-over of Afghanistan.

This triggered the cessation of hundreds of billions of dollars of annual budget support during the 20-year-long US-led engagement as well as the freezing of over 9 billion dollars of Afghan central bank reserves held in the US banks accounting for: (i) a massive decline in formal Pakistan trade with Afghanistan – in September 2021 the assessed import value of transit cargoes was 130.7 million dollars against 444 million dollars in the same month the year before while in August 2021 the value was 273 million dollars against 319 million dollars in the comparable period of the year before; (ii) informal trade (smuggling) was reportedly curtailed due to the fencing of the border by Pakistan though there is no official confirmation of exactly how much, if at all; (iii) Pakistan’s imports from Afghanistan have risen due to the government policy to encourage imports – in July-August 2021 imports rose to 18.9 million dollars against 9.5 million dollars July-August 2020; and (iv) the purchase of dollars by 3 million Afghan nationals resident in Pakistan to remit to relatives back home that in turn prompted the State Bank of Pakistan (SBP) to require ID card information of the remitter to purchase more than 500 dollars.

Economists point out that total trade with Afghanistan was a relatively small percentage of our total trade and that Pakistan’s foreign exchange reserves at over 17 billion dollars and the current account deficit that is not under stress as it continues to be bolstered by a steady rise in the flow of remittances, irrespective of the rising trade deficit, are much more critical contributors to the value of the rupee.

There is, however, the rather serious matter of the inconclusive sixth review talks with the International Monetary Fund (IMF) in spite of repeated claims by the de facto Finance Minister Shaukat Tarin that their success is imminent.

An eroding rupee, it can be argued, is in lieu of resisting the IMF pressure to raise the discount rate, currently at 7.5 percent, to bring it to the positive territory as Consumer Price Index (CPI) for October registered 9.2 percent (the indicator that SBP linked the discount rate to from May 2019 till the onslaught of the pandemic end-March 2020) while core inflation (non-food and non-energy – a more appropriate indicator) in October 2021 was 6.7 percent. It is little wonder that the expectation is that the discount rate will be raised (which in turn will impact on the government borrowing rates) by 100 to 150 basis points in the next scheduled Monetary Policy Committee meeting later this month, which would provide room to intervene in the foreign exchange market.

There is a general misperception that the rupee is in a free float due to the staff-level agreement with the IMF in May 2019. However, a free float is defined as a currency that is set by market forces of supply and demand and only strong currencies including the dollar, the pound or the Euro have the strength to adopt a free float system. The IMF and Pakistan agreed to adopt a market determined exchange rate defined as the SBP exercising discretion to identify disorderly market conditions as and when they become evident and to make appropriate interventions to ensure that their result is minimised.

That discretion needs to be challenged as the impact of the erosion is not only on domestic inflation, thereby impacting on the quality of life of the general public, but also on the government’s indebtedness expected to fuel the budget deficit given that each rupee loss of value vis-a-vis the dollar raises the country’s debt by 100 billion rupees, which again is a highly inflationary policy.

Citing the real effective exchange rate as indicative of an undervalued rupee in spite of the continuing rupee erosion has done little to provide comfort to the market as is evident. And while the country requires IMF support today to provide a comfort level to other bilateral/multilaterals to fund its budgeted expenditure, which may compel the government to negotiate a settlement of conditions with minimal impact on the poor and vulnerable, yet the government has ignored the most obvious solution: cut expenses massively instead of almost doubling the total outlay to 8.4 trillion rupees in the current year from 4.75 trillion rupees budgeted in 2017-18.

Copyright Business Recorder, 2021

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