ON Wednesday, the country’s new finance minister, Ishaq Dar, gave us a glimpse of his plans to stabilise the economy. Predictably, a strong exchange rate remains his top priority as he believes that the rupee is heavily undervalued at the moment owing to speculative pressures.
Next on his agenda is a reduction in inflation and borrowing costs for economic revival. The home currency has already risen by 4.18pc against the dollar in the interbank market in the last four sessions. Whether the market is shedding the speculative fat or pricing in Mr Dar’s interventionist policies, or both, will soon be apparent.
We have seen the exchange rate improve twice in six months for brief periods — the first after the new government took over, and later, when the IMF agreed to restore its stalled loan package — only to decline again. How long the current rally will last is anybody’s guess.
Read: Return of the ‘Dar’ Ages
The truth is that Mr Dar has come back to a Pakistan different to what he had left five years ago to live in self-exile. The country’s macroeconomic environment has become much more precarious and his strong-arming the State Bank into injecting dollars in the market to create an illusion of rapid growth by keeping the rupee overvalued may not work this time.
For starters, the country doesn’t have spare dollars to burn. Even if it had, the new State Bank law severely limits its ability to artificially prop up the exchange rate. Then we have the dollar rising to its 20-year high on continued monetary tightening by the Fed to tame inflation, causing major currencies to slump to all-time lows. How can the rupee, already under pressure due to the foreign exchange crunch and elevated inflation, remain insulated? The value of a currency is but a reflection of an economy’s strength or weakness, and cannot be controlled in isolation.
It is critical to defend the rupee against speculative attacks to end market volatility. But long-term sustainability of the exchange rate depends upon the government’s ability to shore up reserves by boosting exports, remittances and foreign investment. With the economy already in a tailspin, and the government looking for debt relief and waivers in the aftermath of the devastating floods, any misadventure in managing the currency will prove counterproductive for the economy. We have been there before multiple times and suffered enormously. It is time to move away from market manipulations and seek long-term solutions to our economic troubles.
Published in Dawn, September 30th, 2022