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I SUPPOSE we should start with the good news. The finance minister should be congratulated for taking such strong ownership of the country’s economic problems.
After years of seeing the post of finance minister filled by someone who struggled to have his voice heard, it’s a bit refreshing that Ishaq Dar is able to fill that void with his booming and indignant voice. Finally Q Block has a captain on board.
And now the bad news. Having acquired a voice, Q Block must now find a way to calibrate its pitch and volume. If amplitude alone could solve economic problems, we would never be in the situation we’re in.
Take Mr Dar’s recent pronouncements on the delicate matter of the exchange rate. Actually the pronouncements aren’t all that recent if you consider that he’s been talking angrily about defending the rupee since at least early October, saying he wants to bring it back to 100 to a dollar, the rate that prevailed at the start of the fiscal year.
One simple question to put to him: why don’t you go ahead and do it? Why has he been talking so stridently about bringing the rupee to 100 for so long now without being able to make it happen? The answer is simple: he doesn’t have the reserves to make it happen.
In order to lift the rupee exchange rate, the government needs to sell large amounts of dollars to the money markets. With a large supply, prices of the greenback will automatically come down. But to do this, you need to have large supplies of the greenback to begin with. And in Pakistan’s case, these supplies are measured by the reserves, which currently are at levels described as “dangerously low” by informed quarters.
So how do you offload large quantities of dollars into the money markets when you don’t have the reserves from where to get those dollars? Historically, governments have taken to shaking down other large stakeholders in the money markets: banks, exchange companies, exporters. There used to be another instrument back in the ’90s called ‘swaps’ with private parties like Dubai-based gold traders, but the less said about that the better at this stage.
Last week, we heard of a dressing down that Dar delivered to heads of major banks, blaming a small number of them for speculatively withholding dollars from the market in the hopes that the precious greenbacks will be worth a few pennies more later. Apparently it worked because the rupee stabilised and even gained a few paisas following the meeting.
Then he gave his address to the country’s textile industry, more specifically spinning sector heads who form the largest segment of our textile industry. Bring your dollars back, he told them, if I may paraphrase. This time too, it would appear, the ‘advice’ worked.
The good news here is that somebody is strenuously working on the matter at hand. Speculative pressures against the currency always break out when reserves go low and managing these pressures is not easy. Arranging supplies of dollars on a war footing is what the game is all about in these times as is arranging future supplies in a reliable manner.
But playing the game too hard also carries risks. For instance, one cannot shake down exporters and banks forever. They’re likely to run out of funds too if you keep up this game, but more importantly, sensing your desperation, they’re likely to start demanding their pound of flesh in return and start bargaining over the terms of compliance.
Want your dollars, they’ll ask? Then get the taxman off my back, and tell the State Bank to stop increasing the returns I’m obligated to pay on savings accounts. A little more gas for us please, the textile tycoons may ask, and we have our own difficulties with the taxman.
“The minister also exchanged views with the banking industry on the current economic, monetary and fiscal situation,” said the report from last week on the meeting with bankers. Has such a bargaining process begun already?
The textile tycoons were reminded of the benefits they are about to reap from the GSP Plus scheme, perhaps as a way to pre-empt any quid pro quo. But this lot is famous for their thirst for gas and it won’t be long before they’ll be telling us all that without winter gas allocations, the GSP Plus benefits will not flow and the precious dollars will remain out of reach.
So it’s worth considering that shakedowns can get you a few dollars here and there, but they should be used sparingly.
There is another risk Dar is running when he takes such a strident line so publicly on the exchange rate. After promising so hard and forcefully to shore up the rupee’s value, what if he is unable to deliver and devaluation becomes necessary?
In that case he will look weak and his credibility will take a hit. Not a good thing to happen so early in his tenure. Any future commitments he gives will be taken with a grain of salt, and stakeholders will be slower to respond to his frenzied ‘advice’.
Given the risks, is Dar’s strategy of stridently ‘talking up’ the rupee really well thought through? One hopes he has in his inner circle people of equally strong conviction, who are not afraid to speak truth to power, who can counsel a little restraint. After all, strictly speaking, it’s not really the finance minister’s job to manage the exchange rate, now is it?
The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.
Twitter:@khurramhusain
