IT’S happening a lot faster than anyone seems to have anticipated. The wheels are coming off the growth boom (if we can call it that) under the weight of the imbalances it has spawned, specifically the external deficits, even as the latest data shows the pace of activity in large-scale manufacturing is struggling to keep pace and may have hit a plateau. Some industries have struggled to keep pace even with their last year’s levels in July 2020, when the effects of the Covid lockdowns still lingered.
We have learned that the State Bank has ‘thrown’ $1.2 billion into the interbank market since mid-June till the first week of September in a futile attempt to shore up the exchange rate. This came to us in a story by that intrepid reporter Shahbaz Rana, and the story lit the markets with questions. “Can it be?” some asked, pointing out that the amount is too large to have been concealed all this time. And if so, who exactly leaked this data, and for what purpose? The story inspired much speculation about the direction interest rates are going to take and where the exchange rate is going to go. The rupee has been flirting with the 170 level against the dollar in interbank trades for a number of days now, touching that figure only to close slightly below it. Since May it has lost nearly 10 per cent of its value, driven primarily by a surging deficit on the current account.
In fact, the State Bank has been selling dollars in the interbank market since at least January 2021, though it is very hard to get a handle on how much from the publicly available data. Some data on the forward position of the State Bank in foreign exchange markets seems to show large volumes of sales taking place in these months, but it is a good idea to be more careful with this data since it is not as easy to decipher as basic arithmetic might suggest.
The IMF prohibits such sales to countries that are on a programme, and true to that principle, these sales in Pakistan came to a halt in all those months during which the country was on a programme. But now that somebody, somewhere has let the cat out of the bag and made it public that the State Bank has ‘thrown’ $1.2bn into the markets to try and shore up the rupee, and this effort has yielded limited results, the pace of activity in the foreign exchange markets will likely accelerate in the days ahead. And as it accelerates, keeping the rupee below the threshold of 170 will become harder and harder.
Keeping the rupee below the threshold of 170 will become harder and harder.
The problem here is the current account deficit that made a dramatic reappearance in December 2020 and has been climbing ever since. This deficit had seen two quarters of a surplus between July to December, but has plunged into a deeper and deeper deficit ever since. It still recorded a manageable number by the end of the year, at $1.827 billion for the whole year, but the future is not looking good at the moment. Where the State Bank and the finance minister say they expect this deficit to be “manageable” in a range of two to three per cent of GDP, most bankers I’ve spoken to, who have their own projections, are saying its likely to be double this amount. Historically, governments have not had a good track record of projecting their own deficits, especially not in years when they are trying to prime the growth engine.
And adding to the whole mix is another outflow that has opened up as dollars are being sent to cities in Afghanistan where they are fetching anywhere from Rs175 to Rs180 as per anecdotal accounts provided by money changers. Another problem here is the total absence of data, with most people basing their theories on anecdotal evidence provided by relatives or material sourced eventually to money changers. Whatever the theory or the underlying data assumption, these outflows are not large enough to move the exchange rate on their own (money changers give me verbal estimates of $2 million to $4m per day since Aug 15) but it certainly does not help matters. Besides it looks unlikely that these outflows can continue indefinitely given something has to come back in return for them. So far what they are fetching is Pakistani rupees, a finite stock of which circulates in Afghanistan, but once those stocks run down it is difficult to see how Pakistan can remain a supplier of dollar liquidity to Afghanistan.
But things are coming unglued here mostly on the external trade front, and the impacts it is producing on the exchange rate is the biggest indication that the authorities are struggling to keep things under control. If alarms are already sounding on the exchange rate then the whole growth story is in serious jeopardy.
Macro stability in Pakistan stands on four legs: the interest rate, the exchange rate, the foreign exchange reserves and public debt. Faced with a yawning current account deficit all four of these elements cannot stay in place, some of them will have to move. So far they have held interest rates steady and continued accumulating foreign exchange reserves, which means the exchange rate has had to bear the brunt of the impact from the deficit, followed by public debt. But if things keep going like this, very soon other elements may also need to start moving, unless we’re willing to see the rupee rise beyond 180 to the dollar. The question will soon start being asked: can Pakistan afford the growth that this government is pushing?
The writer is a business and economy journalist.
Published in Dawn, September 16th, 2021