Looking at rupee’s fall with the new normal lens

Published October 11, 2021
The rupee has lost about 8.5 per cent of its value against the US dollar since the beginning of this fiscal year on July 1. — Reuters/File
The rupee has lost about 8.5 per cent of its value against the US dollar since the beginning of this fiscal year on July 1. — Reuters/File

The State Bank of Pakistan has recently taken multiple measures — ranging from the imposition of cash margins on hundreds of import items to requiring the purchase of dollars to biometric verification of buyers — all aimed at avoiding a further fall of the rupee.

The rupee has lost about 8.5 per cent of its value against the US dollar since the beginning of this fiscal year on July 1. (It sank to 170.96 a dollar on Oct 6 from 157.54 on June 30).

The central bank is desperately trying to stabilise the exchange rate. But unlike in the past, it is not intervening in the currency market in a big way for two reasons. First, learning from past mistakes the central bank has decided in principle to let market forces determine the exchange rates. And second, its forex reserves that cover the merchandise import bill of just over three months are not strong enough to do this, particularly at a time when regional peace remains clouded after the Taliban takeover of Kabul in mid-August.

These are tough times for those who hate to change. The pandemic has given birth to the new normal. We must change the way we used to think and act.

The fall of the rupee — a 100pc increase in the trade deficit (between July-September) behind it — is not new to Pakistan. But this time around the traditional quick fix cannot work. Why?

There is little room for applying quick-fix solutions to structural problems. In 2018-19 when the rupee lost about 32pc value the government borrowed extensively from ‘friendly countries’ — that was the old way of doing things

The post-pandemic global economy has changed. And, the scope of the new normal is expanding. There is little room for applying quick-fix solutions to structural problems.

Remember what Pakistan did back in 2018-19 when the rupee lost about 32pc value against the US dollar? It borrowed funds extensively from ‘brotherly’ and ‘friendly countries’. That was the old way of doing things.

This option is not available now. Why? Those nations (ie Saudi Arabia, UAE and China) and even other countries such as the US and UK that we could have looked up to for seeking forex funds have tightened controls over forex spending. (The US withdrawal from Afghanistan which many see as hasty came about when Washington realised it cannot afford to fund a never-ending war).

And, Beijing is now examining more closely than before the release of its Belt and Road Initiative funds, according to reports in the Chinese and international media. Saudi Arabia and the UAE are focused on maintaining— or even enhancing — the import coverage ratio of forex reserves to cope with ongoing uncertainties of the pandemic.

The rupee has fallen in recent months despite the fact that Pakistan, just like other countries, received its due share of forex support from the International Monetary Fund to fight the pandemic; the country also received enough amount of free vaccines from the World Health Organisation and friendly nations and part of its foreign debt has been rescheduled.

This is the new normal. Richer nations individually, as part of the global collective as well as international institutions, are realising their responsibility to help economically poor countries steer out of the pandemic-related forex crises. But there is another new normal.

Scientifically advanced nations that led vaccine development programmes and initially shared those vaccines free of cost to other nations are now making billions of dollars in increased exports of vaccines and pharmaceutical and health care products. Export demand for this category is sure to remain strong in the foreseeable future.

And, countries that are not prepared to exploit this potential demand would remain a net importer of vaccines and pharma and healthcare products. Pakistan is one of them, though it is now trying to expand the base of its pharma industry and boost pharma exports. Similarly, the country has only recently started exporting cellphones made in Pakistan with foreign collaboration to reduce net imports of smartphones that consume over a billion dollars a year. Meanwhile, the SBP has made bank financing of imported automobiles more difficult — to reduce the overall merchandise import bill and cut the trade deficit.

The new normal of external account management is this: do what is required to become a net exporter of something big — and do it quickly. Or remain dependent on imports — and let the trade deficit rise and local currency fall.

The global container freight rates index has more than tripled in the past nine months. The index rose from $3,143 in December 2020 to $10,323 in September 2021 mainly due to the pandemic-related interruptions and a surge in global trade as economies started to recover from the 2020 recession. This has led to a sharper increase in the cost of exports and imports of countries like Pakistan whose local shipping industry is least developed.

This phenomenon is the new normal in international trade. But developing the local shipping industry in the short term is not possible as it requires huge funds, vast expertise and a long time. It means Pakistan’s services import bill will continue to rise, putting pressure on the overall (merchandise and services) trade deficit.

That brings up another critical issue. That is, Pakistan’s historical inability to increase its trade with neighbours. Out of our four neighbours (Afghanistan, Iran, China and India), we have enjoyed consistently friendly relations only with China. With Afghanistan and Iran, our trade relations have remained erratic both due to our bilateral issues as well as the sanctions imposed on Iran by the West. As for India, the lesser said the better.

Trading liberally with immediate neighbours would eventually become another new normal pretty soon, strengthening further growing intra-regional trade. But when exactly South Asian nations will learn to resolve their conflicts amicably and embrace this new normal cannot be predicted.

Published in Dawn, The Business and Finance Weekly, October 11th, 2021

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