YET another surprise depreciation of the exchange rate jolted markets on Monday, with its effects lasting through the next day as the stock market came under heavy selling pressure. The decline of Rs4.4 to the US dollar saw the exchange rate land at Rs119.9 from Rs115.5 against the greenback by end of day Monday, not the largest single-day decline but appreciable nonetheless. The pressures leading up to the move had been accumulating relentlessly since March when the last such adjustment took place, and it was common knowledge that another round was due. What was not common knowledge, however, was the timing given that an interim government is in place. It makes sense though, that an interim government would take such a step, since what is principally required is to withdraw the political support that was propping up the rupee artificially over the years, and even through the current fiscal year that has seen four such events since July.

The episodic jolts that have rattled the economy since July through these marginal depreciations are now adding up to present a clearer picture. The revival of growth touted by the PML-N government as its signature achievement is no different from preceding growth spurts seen by the country, most recently in the Musharraf era, in that it was unsustainable. In both cases, what we saw was a short-term boom procured through large injections of foreign capital, whether through borrowing, aid or foreign investment, that depletes the reserves and weighs on the fiscal balance. In this case, the growth spurt was not even as massive or broad based as that of the Musharraf era. The government continued to cling to the hope that the spurt of Chinese investments that entered the country during its tenure would somehow breathe new strength into the external account, but this sounded increasingly like a futile expectation. The optimism fanned by the slight uptick in exports and remittances, upon which the then outgoing finance minister Miftah Ismail pegged high hopes, now seem so small next to the $34bn trade deficit.

For now, it is enough to note that the cycle of boom and bust that has been the biggest legacy of our economic management for well over four decades, ever since the move towards an open and market-driven economy got under way, appears to just have completed one more revolution. The incoming government will inherit another bankrupt treasury, depleted reserves, and it will repeat the same mantra with which every government for decades now has begun its term: ‘we inherited a broken economy.’ The continued widening of the current account deficit is now ample proof that gunning for growth without reforms is a folly that must not be repeated. The next government must bear this in mind when embarking upon its ritual journey to the IMF at the start of its tenure.

Published in Dawn, June 13th, 2018

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