EDITORIAL: The loss of 6.79 rupees to the dollar in one day has sent shock waves not only amongst the economic team leaders — Finance Minister Miftah Ismail and Acting Governor State Bank of Pakistan Murtaza Syed — but the entire cabinet, the coalition partners, importers/exporters, the manufacturing sector reliant on import of raw materials or semi-finished products and, of course, the general public which will bear the brunt of all pass-through costs. One reason behind the fall in the rupee is external to the system, the dollar has strengthened against all major currencies in recent weeks.
However, another reason is the ‘shocking’ Pakistan Tehreek-e-Insaf win in Punjab by-elections on Sunday that has fuelled political uncertainty in not only the country’s most populous province but also the federal government — a sentiment that is reflected by market players not only bringing forward their shipments, the dismal level of forex reserves (as of 7 July 2022 — no more than able to cover 1.5 months of imports given today’s commodity prices) but also holding off any previous plans for increasing investment. In this untenable scenario for the government, not to appoint a full-time tenured governor of SBP is inexplicable.
The Shehbaz Sharif-led government has been in power since 11 April with the previous Governor completing his term on 5 May; and given the ongoing economic impasse, instead of appointing a Governor as soon as possible, this government made do with an Acting Governor for nearly 10 weeks that is simply inexplicable.
The SBP board, at present, has 5 directors as against the total strength of 10 and this too will whittle down to only two directors (the governor and secretary finance) as three directors would complete their tenure tomorrow. It is hoped that the federal government would ensure that the SBP board of directors, an integral part of the SBP structure, does not become dysfunctional (the required quorum for a meeting of the board is five) and appoint directors on the SBP board.
The rupee value is market-based as agreed with the Fund in the ongoing Extended Fund Facility programme and the rate is set within the confines of a framework that establishes floors for international reserves (which are likely to be strengthened not earlier than 27 to 28 August by 1.2 billion dollar as per Ismail) and the remaining 3 billion dollars (loans) would be credited as reserves by the end of the calendar year. In other words, the SBP is not operating within an inflation targeting framework and while SBP certainly does not have enough reserves to intervene in the market yet it must exercise its considerable knowledge of the capital market to set the band within which the rupee may fluctuate which in turn is a function of its assessment of the prevailing market conditions.
Two observations are in order. First, the budget 2022-23 macroeconomic framework is now totally out of synch with the rupee-dollar rate taken at 183 — a mind boggling 40 rupees less than the current interbank rate (bid) of 223 rupees to the dollar. This makes a mockery of budgetary projections of debt servicing as each rupee loss vis-a-vis one dollar is estimated to raise servicing of debt by 100,000 rupees. Second, and perhaps more disturbing from a political perspective, is the contribution of each rupee lost to the dollar on inflation, given that Pakistan is heavily reliant on import of petroleum and products and cooking oil to meet domestic needs.
Thus the Pakistani public is facing a double whammy in terms of the monetary policy: a high discount rate (15 percent at present widely projected to rise in months to come) that is throttling output leading to unemployment, higher taxes for income groups between 50,000 and 200,000 rupees per month and a rising dollar value that is further eroding the value of each rupee earned.
One would hope that given these dire circumstances facing the people of this country it is time for the government to shake off the inertia that it is afflicted with and take the requisite steps in tandem with the central bank to reverse the perception of a PKR in free fall and at the mercy of manipulators.
Copyright Business Recorder, 2022