THE decision to float the currency on Thursday, May 16, has been linked to the forthcoming IMF programme. With media reports about a further 200 bps increase in interest rates as a possible prior action, we thought the State Bank would move first on interest rates.
The change in policy priority is to save face.
Consider the following: the bank was to announce its monetary policy for the next two months at the end of this month — going by their schedule, this would have been on May 25. Increasing interest rates out of the blue would have been seen as complying with the IMF’s demands. Hence, to create a pretext to hike rates, the bank let the currency weaken on May 16 and brought forward the monetary policy announcement to May 20.
In terms of dates and sequencing, it works — in terms of narrative, it doesn’t.
On Thursday, the State Bank spokesman said the currency adjustment reflects supply-demand pressures in the foreign exchange market. But surely this does not mean that supply-demand pressures disappeared since Nov 30, 2018, when the interbank rate was Rs140.3 per US dollar, or that the external deficit was easy to finance in the past five months? With the rupee-dollar parity closing at Rs145.82 per dollar on May 16 and Rs148.75 per dollar on May 17, does this mean the foreign exchange market has, all of a sudden, come to life?
The government’s economic statements are not convincing.
Adviser to the Prime Minister on Finance Abdul Hafeez Shaikh had a slightly different take on the rupee. In a press conference on Thursday, he stated that the State Bank’s monetary policy committee (which he describes as autonomous and professional) is responsible for determining the right level for the currency. For people in the know, the rupee parity is never discussed or debated in any committee, as even a whiff of this discussion would change market dynamics before the bank makes it move. Exchange rate changes are just implemented.
This sort of economic narrative will not convince the people or calm business sentiments. To justify the currency adjustment, the narrative should have focused on the unsustainable trade deficit; the country’s addiction to imports and the unbearable burden of borrowing just to repay dollar debts. The narrative should have ended with an urgent call to all Pakistanis to only buy Pakistani goods.
Supply-demand dynamics and the autonomy of the monetary policy committee will not satisfy people who face mounting economic hardship.
This unhelpful narrative is not limited to the currency. Hafeez Shaikh has talked about how the IMF programme is pro-poor and pro-growth. Posturing aside, an IMF economist would cringe if he/she heard this, because a stabilisation programme is really about austerity and narrowing the twin deficits.
More specifically, the government claims that since utility rates will not be increased on the poor, this policy is pro-poor. Relatively speaking, yes, but what about the jobs that will be lost when the economy slows and inflation increases? Will the same utility rates be a source of comfort when you don’t have a job? Furthermore, talking up subsidies in the power sector may be good politics, but for those who will have to pay more for electricity, there should have been a mention of how the circular debt is choking the economy.
Similarly, the IMF programme is allegedly pro-growth because it protects development spending, which will create jobs. This may happen, but for someone in the private sector who has just lost their job, this creates an expectation that the government will give them a job. Again, a non-starter.
A final point about social media. The need for a coherent (and credible) narrative is further enhanced when one realises how social media is being used. The amnesty scheme is a case in point: TV channels and WhatsApp users are busy showing Prime Minister Imran Khan’s old campaign speeches in which he denounces the PML-N amnesty scheme, with the promise of holding accountable all those who availed the scheme.
Now, the PTI’s narrative is that its version is not an amnesty scheme but an “asset declaration ordinance”, and there is no mention of the sweet deal being offered to tax evaders. During his campaign, however, the prime minister had correctly described such schemes as punishing honest people and rewarding the corrupt.
The issue is that the PTI’s economic narrative will be put to the test by the opposition, which is gearing up for mass demonstrations after Eid. The campaign promises that got the ruling party elected cannot be squared with the economic direction that is being shown by inducted technocrats.
For Pakistan’s economic and political stability, the PTI’s economic narrative must become more accurate, credible and realistic.
The writer is the founder of doctored papers, an economic advisory firm.
Published in Dawn, May 22nd, 2019