During the week ending on July 29, the rupee lost 4.8 per cent more of its value against the US dollar. This brings the total loss the rupee has suffered since the end of Imran Khan’s government on April 7 to 27.2pc.

Meanwhile, foreign exchange reserves held by the State Bank of Pakistan (SBP) that stood at $11.425 billion at the end of March gradually shrank to $8.575bn as of 22nd July.

Falling reserves and declining rupee are hot topics of heated political debates with some blaming the post-IK political chaos for this debacle and some claiming that the current PML-N led coalition government had inherited mountains of external debts and weak fundamentals of the external sector.

Finance Minister Miftah Ismail says better days are not far off. He expects that after the approval of the International Monetary Fund’s (IMF) loan tranche of about $1.2bn sometime in mid-August, lots of foreign exchange would pour into the country from multiple sources and the reserves would grow in size and the rupee would stabilise. The SBP, too, has reassured the nation that the country is not on the brink of default at all and the exchange rates and reserve issues are expected to be fixed after the IMF’s lending.

Pakistan has long been fixing its balance of payments problems with borrowed foreign funds, increasing debt servicing requirements year after year

In nine months of the last fiscal year, between July 2021 and March 2022, Pakistan spent $10.885bn on external debt servicing, according to the State Bank of Pakistan. On average, the country’s quarterly external debt servicing stood around $3.628bn.

More recent data on the external debt servicing data has not been published yet but even if we assume that it was equal to the average of the previous three quarters, at least $3.628bn more flew out of our forex market during April-June 2022. (Actual April-June external debt servicing requirement this year must have been far larger. Even in the Jan-March quarter, the country had to spend $4.875bn under this head.)This is one big reason behind the ongoing depreciation of the rupee and the shrinking of precious foreign exchange reserves.

Full 2021-22 spending on external debt servicing can be safely estimated at around $15bn.

When we talk about the rupee’s health we need to keep in mind two important things. First, the fact that imports have grown too large now that even combined forex earnings from exports of goods and services and remittances fall short in financing just the imports of goods. In 2021-22, exports of services fetched $39.418bn and remittances $31.238bn. Against this imports of goods (FOB value) totalled $72.048bn.

Secondly, we spend more than double the amount of our total exports of services or about half the amount of our total exports of goods on servicing external debts. In 2021-22, exports of goods (FOB value) totalled $32.45bn and exports of services totalled $6.986bn.

This shows the gravity of the structural weakness of the rupee. Short-term factors like political instability at home and one-off external shocks like the historic rise of the US dollar in the global forex market or high international prices of fuel and food also weigh down the local currency. But they too have a more pronounced impact on the exchange rate only in the presence of structural reasons for the external account imbalance of our country.

Pakistan has long been fixing its balance of payments problems with borrowed foreign funds. As a result mountains of external debts continue to grow in size, increasing debt servicing requirements year after year.

Pakistan’s overall public external debt which stood at $75.357bn at the end of June 2018 gradually swelled to $100.296bn at the end of March 2022, according to the SBP. The external debts of the federal government alone increased from $64.142bn to $81.294bn during this period.

Growing external debts keep hitting the external sector more and more in two ways: first, it directly increases the cost of external debt servicing — and thus, the further need for more foreign borrowings. And second, the allocation of the rupee counterpart of the external debt servicing increases every year with the growing need for it.

That, along with the allocation for internal debt services, defence, and current expenses of the government squeezes fiscal space for development spending. And then, lesser development spending darkens the prospects of long-term growth of exports and also affects potential earnings through remittances. (Lesser development spending comes in the way of producing better professionals/managers and skilled workers that can earn more per-person wages abroad).

Structural issues in our external sector are serious. It would be naïve to expect the rupee to make big gains after the release of the IMF’s loan tranche. The government has already lifted the ban on imports of luxury items, with a few exceptions. And, after the release of the IMF’s funds, the SBP too would not be rationing foreign exchange for importers.

The first factor would raise the monthly import bill and the second one would increase intra-day demand for dollars. The two factors combined would keep the rupee under pressure. It is also naïve to expect that SBP’s forex would grow anytime soon to be equal to three months of goods’ imports bill — a level considered the bare minimum for countries.

Given the fundamentals of our external sector, this might take more than a quarter, if it is possible at all. It might remain a dream if the exchange rates become too volatile amidst growing political polarisation in the country, necessitating for the SBP to intervene in the forex market and start selling dollars to defend the rupee even for a little while.

Published in Dawn, The Business and Finance Weekly, August 1st, 2022