On December 14 when a depreciating rupee had regained stability, Herald Finger, the visiting IMF mission head, observed that Pakistan did not need an IMF bailout.

His advice was that ‘continued exchange rate flexibility will be important to facilitate external adjustments, to support exports and economic growth.’ The mission also stressed the need for ‘continued strengthening of the financial sector’ and building up of foreign reserves.

Mr Finger’s statement sends a positive signal to the international financial markets and assures them that their confidence in Pakistan’s economy is well placed.

While policymakers seem to be taking a different approach to ease the mounting pressure on the external sector, they still rely on the IMF compass to guide them

Foreign investors are encouraged to put their money in Pakistani bonds as economic growth gains momentum and completed energy and infrastructure projects add muscle and efficiency to the economy. The China-Pakistan Economic Corridor (CPEC) also holds the promise of a game changer.

However, Mr Finger’s advice for continued exchange rate flexibility, which coincided with the stability the rupee gained after a week’s depreciation, also raises a big question: how steep will be the rupee’s fall? Going by conventional wisdom, currency experts predict that the fall will be steep whether the national currency is allowed to depreciate gradually or in one go.

If there is a steep fall, the impact of a much weaker exchange rate will weigh on debt repayment/servicing and fiscal deficit; momentum of economic growth and employment; investment in real economy, particularly CPEC projects; inflation and real wages etc.

Currency depreciation and high interest rates are usually part of IMF’s programme to shore up a faltering global financial system. In case of Pakistan, the real beneficiaries of such measures are the local banks.

Commercial banks had been looking forward to and forecasting the imminent depreciation of the ‘over-valued’ national currency throughout the period the rupee remained stable. The State Bank of Pakistan (SBP) noted in its third quarterly report (July-September) that low interest rates and administrative expenses were impairing bank earnings.

In recent times, local banks have prospered on World Bank funded reforms and investments in government papers. Banks find it risky to fund much of the activity in productive sectors of the economy except for financing foreign trade or big profitable corporations.

In the quarterly report quoted earlier, the SBP had advised the banks to remain ‘vigilant’ against the ‘mismatch’ between ‘rising long-term advances and declining share of fixed deposits.’ Hence the need for a ‘flexible exchange rate policy’ that provides room for speculative activity in the currency and capital market.

In their book ‘Fair Trade for All’, Nobel Prize winner Joseph Stiglitz and Andrew Charlton wrote: “Theory that foreign trade is good for growth and good for (public) welfare has lost its way in global market practices. The pro-development agenda has taken a back seat. With no proper sequencing, trade liberalisation has ignored the sensitivities of prevailing national conditions.”

The devaluation decision landed on the heels of exports rising at a fairly brisk pace—11.8 per cent during the first five months of the current fiscal year — propelled by subsidies and remittances. They show initial signs of returning to their northward journey, albeit with a slower pace of 1.3pc during July-November.

Devaluation was also preceded by a successful launch of bonds. The international market had expressed confidence in Pakistan’s economy by subscribing to $2.5 billion worth of Pakistani bonds. This helped raise the foreign exchange reserves to a comfortable level of $21bn. The reserves would be further boosted by another bond to be launched in 45 days. Foreign direct investment, too, rose by 57.2pc in the same period to $1.4bn. These improvements came about without devolution.

Before devaluation the rupee had remained stable this year against the dollar, which fell by almost 9pc on a trade-weighted basis from the start of the calendar year to mid-September.

Western experts were then of the view that the dollar was moving towards one of the fair benchmarks: the greenback’s purchasing power parity. In case of Pakistan, the gap between the rupee’s exchange rate and its purchasing power parity with the dollar is very wide. It is time to move gradually towards a fairer exchange rate by minimising the pace of rupee depreciation.

Finance Secretary Shahid Mahmood says, “We do not want to go to the IMF”, and assures that they will take every step to ensure it. He is of the view that devaluation will arrest the import trends. Signs of contraction of imports after recent regulatory duties are already visible.

Deceleration will also be observed in import of machinery for energy projects which are in the completion stage.

The market perception is that devaluation may help cut imports but would not boost exports. However, it needs to be conceded here that increased production and supplies of goods in a growing domestic economy have better opportunity for foreign sales with the demand picking up in the international market. And yet devaluation as past record shows, offers no long- term solution either for export or import.

While policymakers seem to be taking a different approach to ease the mounting pressure on the external sector, they still rely on the IMF compass to guide and support their future course of action.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, December 25th, 2017

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