The rupee is stable on the interbank market at 87.60 per dollar while it is in a tailspin on the kerb, touching above 90 per dollar. The rationale for this wide divergence in exchange rate is evident: the State Bank of Pakistan intervened in the interbank market and released dollars to banks on Monday, the exact amount unknown, which led to the rupee stabilisation in that market while no such intervention was deemed necessary for the open market.
Business Recorder strongly recommends SBP intervention in the kerb market to guarantee that speculators responsible for a bearish sentiment on the market take positions that are more in synch with our short- to medium-term policy objectives, namely to ensure that export earnings as well as remittances do not decline.
There is sufficient empirical evidence in support of the Marshall Lerner condition which stipulates that a depreciating currency will not improve a country's balance of payment (BoP) position through a positive impact on exports (as they become more attractive to foreign buyers) or reducing imports (as they become more expensive) if the price elasticity of exports and imports is greater than one.
Our major exports (textiles, raw cotton, wheat) and major imports (oil and products as well as machinery) have an elasticity less than one or, in other words, if the rupee value declines then total export earnings will decline while the cost of imports will rise. In Pakistan the additional element of exporters holding back proceeds, importers sending the bare essential foreign currency to suppliers and overseas Pakistanis sending less as remittance income through the country's banking system may account for SBP decision to promptly intervene in the interbank market.
Additionally, an eroding interbank rupee value would have had a massive impact on the country's external indebtedness as each dollar borrowed would be much more expensive to repay. This, in turn, would also increase the total outlay on foreign loan repayment and interest on foreign debt estimated at the beginning of the year which would translate into an increase in current expenditure requiring a decrease in development expenditure and a rise in the budget deficit with its accompanying impact on the rate of inflation as happened last year.
Questions are being asked as to why the PKR came under intense pressure at a time when the country's BoP position was stable due to an unprecedented rise in remittances and exports accounting for a highly significant contraction in the trade deficit. The Pakistani economy is, by and large, not well integrated into the global economy. Therefore, the impact of the fall in overseas markets that wiped away 3.4 trillion dollars during the past week was limited; however, Pakistan has been persistently in the grip of weak macroeconomic variables for the fourth year running compelling investors, coupled with the government's decision not to seek to reactivate the stalled Stand-By Arrangement or seek a new loan from the IMF, to move towards gold and dollars in an effort to insulate the value of their investments. It is this market that must now be targeted through open market interventions of the SBP.
However, the long-term solution to ensure a stable rupee must focus on reforms designed specifically to achieve macroeconomic stabilisation that must contain policies designed to decrease reliance on borrowing (domestic as well as external) through reducing expenditure and/or raising revenue and ensuring a sustainable budget deficit.
At the present moment in time, there is a serious concern that getting out of any IMF programme would imply even lower commitment to implementing critical reforms that include eliminating the inter-circular debt and broad-basing the tax system than when the IMF wielded the ultimate stick of not releasing a much-needed tranche. And with the recent escalating tensions between the US and Pakistan, there is little prospect of a friendly US administration seeking to pressurise the IMF to extend assistance on politically acceptable though economically challenging conditions like in 2008. The onus thus rests with the government and one sincerely hopes it is up to the challenge.