State Bank Governor Reza Baqir’s remarks on the gains the families of overseas Pakistanis might — or might not — have accrued from the sharp depreciation in the value of country’s currency demonstrate his deep insulation from the Main Street even after over two years in office.
It also gives us some insight into the lack of empathy in the government’s team for a vast majority of people struggling to cope with massive hardships caused by erosion of the rupee’s purchasing power amid stagnating wages, and elevated food and headline price inflation. It further illustrates the insensitivity with which the policymakers can act when defending the consequences of their decisions that cause massive pain to the majority of Pakistanis.
Speaking at a dinner in London last week hosted by British Pakistani billionaire Anil Mussarat, the central bank chief argued that some lose out from the exchange rate changes and others benefit. “If in this year remittances are approximately $30 billion — and we hope they are higher — and if our exchange rate depreciates 10 per cent it would translate to an additional over Rs500bn reaching the families of the overseas Pakistanis back home. In every economic policy, there are advantages for some and disadvantages for others.” He didn’t stop there, saying those who buy imported products or those who travel abroad are facing difficulties.
If things don’t settle with the IMF — and the United States — we may see the currency breach many barriers in the coming weeks and months, much faster than what we have guessed so far
Mr Baqir’s argument in defence of exchange rate depreciation not only lacks empathy for the man on the street but is also flawed. The foreign remittances at best represent just below 5pc of the total household income for a fraction of the country’s population as per the Household Integrated Economic Survey (HIES) 2018-19. The ratio varies between above 2pc and below 7pc for the poorest to richest quintile. The nine million or so Pakistanis working and living abroad are just over 4pc of the country’s total population of 220m. Even not all of them ‘benefit’ from the exchange rate increase as food and energy price inflation, owing to devaluation of home currency and other factors, largely eats into additional transfers of cash on account of the rising price of dollars.
Former finance advisor under Pervez Musharraf Salman Shah went a bit far in the defence of the governor. In doing so he however got his numbers mixed up. “The currency depreciation has benefitted 60pc of the country’s low- to middle-income households since 9m out of a total 15m such households receive remittances (sent by one or more of their family members living and working abroad),” Mr Shah, who works as an advisor to the Punjab government at present, wrote in a WhatsApp group. “(Some) 60pc of low-income groups are recipients (of remittances). Whole townships are based on remittances.” In other words, the steep devaluation is not only good but has also brought prosperity to the country.
Many analysts are of the view that the rupee’s value has been falling because of the expansive growth policies being followed by finance advisors Shaukat Tarin and Reza Baqir. “Mr Baqir’s remarks are actually aimed at hiding the failure of these policies in controlling the spiking current account deficit,” said an analyst who prefers anonymity.
Mr Baqir has repeatedly stated in recent months that the exchange rate was the first line of defence against external pressures. But this defence line seems to have failed to contain the current account deficit that has already hit 4.1pc of GDP in the first quarter to September of the current fiscal year, exceeding the 2-3pc range projected by the State Bank of Pakistan for the entire year as trade deficit doubled to $10.2bn from $5.3bn a year ago owing to an over 66pc jump in imports to $18.7bn.
The soaring demand for hard currency means a dollar now costs 174 rupees on the interbank market, adding pressure to inflation. The rupee continues to lose value in spite of the steps taken by the central bank and the government to put limits on dollar purchases and restrict imports to cool down the economy. The Federal Investigation Agency is investigating several exchange companies. Yet the Pakistanis are losing confidence in their home currency as the exchange rate increase is eroding their savings. The delay in reaching a deal with the International Monetary Fund (IMF) for resumption of the $6bn programme to protect the nation’s meagre liquid foreign exchange reserves is also adding to the currency pessimism with those who can afford “dollarising” their savings or putting their money in assets considered immune to devaluation.
“The government is reaping what it sowed without any regard for the risks that its pursuit of debt-fueled import-dependent growth strategy would pose to the country’s weak balance of payments position,” another analyst argued. In his view, the changes in geopolitics after the Taliban takeover of Afghanistan weeks after American pullout from the war-ravaged country has only complicated matters for Pakistan. “If anything, the inconclusive talks with the IMF show coldness in Pakistan’s relations with Washington, which does not augur well for the economy — at least not at this difficult juncture. If things don’t settle with the IMF — and the United States — we may see the currency breach many barriers in the coming weeks and months, much faster than what we have guessed so far. That will give Mr Baqir one more occasion to teach us how the devaluation of currency benefits overseas Pakistanis in his typical style and measured words.”
Published in Dawn, The Business and Finance Weekly, October 25th, 2021