IN the midst of the power struggle in the country, the rupee slid past 200 to a dollar in the interbank market last Friday. The persistent decline in the value of the home currency, which has dropped by about 32pc against the dollar in the last one year from a low of 152, has been caused by balance-of-payment constraints on the back of a surging import bill, a soaring current account deficit and depleting foreign exchange reserves. Increased political uncertainty, decision paralysis, unsustainable energy subsidies and suspension of the IMF programme have quickened the rupee’s downward journey in recent weeks. That multiple curbs placed on dollar purchases from the open market by the central bank to arrest the decline in value in winter failed to fend off speculative raids on the currency shows that the exchange rate is almost impossible to manage without improvements in economic fundamentals through tough decisions. Instead, the restrictions have led to dollar hoarding, created a huge black market and exponentially raised the premium charged by currency dealers on under-the-counter transactions.

How the exchange rate market behaves in the coming days largely depends on the outcome of Pakistan’s ongoing talks with the IMF in Doha for the restoration of the Fund’s programme, which will pave the way for funding from other multilateral and bilateral lenders. Needless to say, the outcome of ongoing negotiations with the IMF hinges on the government’s decision to reverse the energy subsidies and prepare an austere budget for the next financial year. Although the government says it is ready to take politically unpopular measures, it is delaying crucial decisions because of pressure over the timing of the next elections. If they cannot complete the remaining tenure of the assemblies, the coalition partners would not want to make decisions that can erode their political capital ahead of the polls. With the final round of negotiations expected to take place on May 24 and May 25 as stated by the prime minister, Pakistan is fast running out of time to meet the Fund’s conditions for the revival of its programme. The currency market has responded positively to what many describe as inconsequential import curbs placed by the government to stop the depletion of foreign currency reserves. But that will do only so much. It’s time all players understood the grim economic reality, and helped reduce political uncertainty over the tenure of the coalition rather than adding to it.

Published in Dawn, May 22nd, 2022