EDITORIAL: The rupee remains in a free fall and a number of relevant economic rationale and explanations are being presented as the reasons for the erosion in rupee value: (i) the dwindling foreign exchange reserves, down to 8.9 billion dollars as of 10 June 2022 — not enough for even a month and half of imports especially with the continued rise in the international prices of our major import item — petroleum and products; until and unless the pledged assistance from friendly countries, reportedly linked to the success of the seventh review with the International Monetary Fund, is credited, the rupee will remain under considerable stress exacerbated by the failure of the budget 2022-23 to meet key International Monetary Fund’s (IMF’s) conditionalities or address its major concerns; (ii) the high discount rate of 13.75 percent (a monetary policy tool) has yet to contain imports to generate a trade deficit that is sustainable.
The July-May 2022 data reveals a trade deficit of 43.424 billion dollars, a 58.18 percent rise from the comparable period of the year before, with imports rising by 44 percent to reach the historic high of 72.297 billion dollars (no doubt due to extraordinary conditions prevailing in the international market due to the Russia-Ukraine war) and exports rising by 27.89 percent (attributed to the high price of our exports rather than to a rise in the quantity of our exports) to 28.873 billion dollars; however, interest rate differentials with regional competing countries, particularly India and Bangladesh, are significant which are also contributing to the rupee erosion; (iii) economic fundamentals are weak even though productivity has risen this year, yet the rise is due to the low base last year which will decline in months to come as and when the country goes back on the Fund programme with its associated severely contractionary monetary (already in place though the discount rate is expected to be further raised in the next Monetary Policy Committee meeting) and fiscal policies (with the budgeted revenue expected to be challenged by the Fund especially as more than 60 percent raise is linked to an overoptimistic GDP growth rate of 4.9 percent); and (iv) political uncertainty which remains a factor contributing to investor reluctance to enter the market at this time.
The previous government agreed to a market-determined exchange rate with the Fund, which, contrary to general opinion, is not defined as a free float. The Fund defines it as when a central bank does not have a specific exchange path or target and indicators for managing the rate are broadly judgemental, for example, balance of payments position, international reserves, and parallel market developments adding that “adjustments may or may not be automatic and intervention may be aimed at moderating the rate of change and prevent undue fluctuations (disorderly market conditions) that may be direct (through purchase/sale of dollars by the central bank) or indirect (exerting its power as the banking sector’s regulator)”.
Granted that the reserves are not enough to support any adjustments to the rupee’s external value yet it is a judgement call by the State Bank of Pakistan (SBP) and this very judgement call requires a response from a confirmed Governor who enjoys the latitude offered by security of tenure and is not awaiting appointment of a person to head the central bank.
State Bank of Pakistan is currently headed by an Acting Governor, a position that is extremely critical today as the Governor chairs the MPC that, in turn, decides on the discount rate, a critical monetary policy tool. In addition, the Governor and the Finance Minister are both signatories to the IMF programme agreement (and all subsequent reviews) and given that the seventh review has a host of extremely harsh conditions it is critical to ensuring that a tenured governor is appointed.
The general consensus is that the government wants its own man/woman as the governor — one who would no doubt toe the line given by the Cabinet, thereby making a mockery of the autonomy granted to the apex bank by the previous administration in accordance with an IMF condition. While it is the government’s prerogative to appoint the next Governor yet it does not have the luxury of time and one would hope that this position is filled prior to the seventh review success.
Copyright Business Recorder, 2022