Many hearts and minds moved with fluctuations in the rupee value before and after the July 25 elections because much was at stake, including the push and the pull of political pride.

Although sentiments can’t rule the exchange rates, they can sway them in a certain direction briefly.

Former finance minister Ishaq Dar’s policy of keeping the rupee overvalued had started backfiring long before the elections. When Imran Khan took over as prime minister on August 18, the rupee had already lost enough ground to the dollar.

The new government decided to let the central bank do its job and refrained from any misadventure in the exchange rate regime with the result that supply and demand in the interbank market determined the rupee value. That’s the official line.

In fact, this government also wanted to halt the rupee slide as eagerly as the previous one. When the State Bank of Pakistan (SBP) let the rupee adjust to growing demand pressure on Oct 9, it had to do a lot of explaining to the government.

Seeking foreign exchange support from friendly nations is justified. But this strategy cannot replace a regular, discipline-enforcing IMF package

Just a day before Mr Khan took over as prime minister, the rupee had closed at 124.05 to the dollar in the interbank market. It remained range-bound for less than two months not because external-sector fundamentals became strong. It was so because the SBP had already corrected the course of the overvalued rupee in the past few months.

The SBP allowed further rupee depreciation on Oct 9 after the PTI government had formally approached the International Monetary Fund (IMF) for balance-of-payments support. Meanwhile, its foreign exchange reserves plunged to $7.6 billion — or equal to a little more than one and a half months of imports. On that day, the rupee shed more than 7.5pc value vis-à-vis the dollar at the close of business in the interbank market.

Ever since, the central bank has been somehow managing to keep it somewhat stable. After closing at 133.64 to a dollar on Oct 9, the rupee slipped below 134 in intraday trade in the interbank market on several occasions. But the closing rate has not breached this barrier. Continuous erosion in the central bank’s reserves due to a large trade deficit — despite a slowdown in imports and pickup in exports — has kept the rupee under pressure even after $1bn placement with the SBP from Saudi Arabia.

If Saudi Arabia pours in $1-2bn more, as the government anticipates, that might help in keeping the rupee stable during external debt servicing in December.

The IMF, meanwhile, wants exchange rates to be freed from whatever little intervention the SBP makes to prop up the faltering rupee. The IMF may not compromise on this condition if the government finally decides to avail its bailout programme, according to sources familiar with recent talks between an IMF mission and the government. Finance Minister Asad Umar, however, has said the government is in no hurry to seek the IMF bailout and has assured the nation that the strings attached with its lending will be examined thoroughly.

A double-digit growth in remittances and merchandise exports has been recorded after the PTI came to power. But given the enormity of the trade and current account deficits, the volumetric increase in both sources of non-debt-creating foreign exchange inflows is not enough. Foreign direct investment (FDI) also remains low in volume and is not growing.

Under these circumstances, seeking foreign exchange support from friendly nations like Saudi Arabia, China, the United Arab Emirates — and now even Malaysia — could be justified. But this can in no way substitute a regular, discipline-enforcing IMF balance-of-payments support package.

Hoping for exports and remittances and even FDI to grow fast enough — and that too in the short run — to take care of huge trade and current account deficits is one thing, but turning it into reality is another. Keep the statistics in mind: in the first four months of this fiscal year, our current account deficit stood at $4.84bn, only slightly lower than $5.07bn from a year ago. The deficit in trade of goods and services combined increased to $11.6bn from $11.45bn. Talk about the overall balance-of-payments surplus of $1.6bn in July-October? Well, that has basically originated from the drawdown on foreign exchange reserves.

By the way, our first quarter (July-September) fiscal deficit, with its much-acknowledged impact on the exchange rate, is still very large — about Rs541.7bn or 1.4pc of GDP. Do we see here a reason for rising above sentimentalism and address economic issues with sobriety?

Published in Dawn, The Business and Finance Weekly, November 26th, 2018