EDITORIAL: In a spirited defence of his signature policy to control the external value of the rupee, former four-time Finance Minister, Ishaq Dar, in his address to the Senate averred that devaluation of a currency is “the mother of all evils” and that a stable currency guarantees economic progress and prosperity in a country.
This economically severely flawed comment shows a mindset that is unable to grasp a basic economic principle, notably that a strong currency acts as an incentive to importers and a disincentive to exporters – a principle that countries with qualified finance ministers have tried to use to their advantage by depreciating the value of their currency rather than appreciating it. To mitigate the possibility of any country depreciating its currency to gain an unfair trade advantage the International Monetary Fund (IMF) as well as the World Trade Organisation (WTO) require, member countries to refrain from manipulation of their currencies. China, for example, was accused by the US of currency depreciation to get an unfair trade advantage with the US and other countries.
Dar during his last two tenures (2013-17 and 27 September 2022 to August 2023) deliberately controlled the rupee-dollar parity with the overarching objective of understating the debt servicing costs that escalated to an unsustainable 45 percent of current expenditure last fiscal year, which he then proceeded to raise further to 54 percent in the current year’s budget.
And implicit in having a strong rupee is the fact that with Pakistan reliant on imports of essential items, including petroleum products and cooking oil, to meet its domestic needs, an overvalued rupee would assist in understating the rate of inflation. However, while as a chartered professional accountant Dar’s focus was understandably on balancing the books yet the outcome on the economy was nothing short of a disaster because imports became cheaper, exports were priced out leading to deindustrialisation.
In 2013-17, Dar’s decision to keep the rupee strong was accompanied by a marked preference for external loans over domestic loans (ostensibly as the rate of mark-up was lower on external loans), which led to a serious balance of payments problem prompting his successor, Miftah Ismail, to allow the rupee to depreciate on the advice of a visiting IMF team late 2017. The depreciation was not enough, 2018 was an election year, which then led to the highest-ever current account deficit in the history of the country that was inherited by the Pakistan Tehreek-e-Insaf (PTI) government and which necessitated going on the twenty-third IMF programme.
Cognizant of Dar’s policy to keep the rupee strong, the IMF insisted on a market determined exchange rate as a prior condition for the 2019 Extended Fund Facility (EFF) programme – a rate determined on the basis of key economic fundamentals (foreign exchange reserves, current account, etc.) rather than by a directive issued by the Finance Ministry. To avert the possibility of the Finance Ministry issuing a directive again, the IMF insisted on the passage of a law by parliament to ensure the autonomy of the State Bank of Pakistan (SBP).
Pakistan has invariably suffered from the executive making a distinction between the letter of the law as opposed to its spirit which led Ishaq Dar, during his last stint as the finance minister in 2022, to influence the interbank rupee-dollar parity – at a time when reserves had plummeted to less than a month of imports which disabled the apex bank from intervening in the market, thereby generating multiple rates. This was unlike the 2013-17 period when the country borrowed large sums from abroad to strengthen its reserves which then enabled the SBP (State Bank of Pakistan) to intervene in the market with those borrowed funds.
Dar’s claims that he met all Fund conditions by January 2023, on the floor of the House, is debunked in the IMF’s 30 June 2023 Stand-By Arrangement documents which state that “after reserves declined to about 3 billion dollars (half month of import coverage) in mid-January 2023 the exchange rate was allowed to depreciate by almost 10 percent on January 26. However, the normalisation in the FX market was short lived, with premium emerging in February (amid a notable appreciation), and again from May onwards.”
Countries like Pakistan, not only rely on exports as a desired form of foreign exchange earnings but also through home remittance inflows. These inflows have been compromised due to the prevalence of the illegal hundi/hawala system in the past; however, with global lockdowns associated with Covid-19 the official channels began to be used and remittance inflows exceeded exports in 2021-22. The attempt to keep the rupee strong last fiscal year led to home remittances plunging by 4 billion dollars last year compared to the year before, and the IMF’s refusal to declare the ninth staff-level agreement a success led to the threat of a looming default on the horizon. The caretaker Finance Minister, Dr Shamshad Akhtar, has earmarked an unbudgeted 70 billion rupees to further incentivize remittance inflows through official channels though time will tell if this measure will be effective.
Dar’s defence of his policy to keep the rupee strong bears testimony to his background as an accountant, who is apparently unaware or chooses to brush aside linkages within an economy. Sadly, he still remains adamant despite the pernicious consequences that had to be endured because of his preference of accounting doctrine over economic principles in managing the economy.
Copyright Business Recorder, 2023