Bucking the trend

Published October 9, 2022

IS the Dar factor at play? Or are we missing something that only he can see?

The Pakistani currency has appreciated 8.25pc to 219.92 to a dollar since Sept 22. The rupee is actually the world’s best-performing currency lately. But its rise isn’t consistent with many global and domestic economic indicators. For instance, the dollar has appreciated against every hard currency, spawning fears of another global currency crash not seen since the 1997 Asian crisis. How is the rupee defying the trend?

Then, the State Bank’s liquid foreign exchange reserves are decreasing despite stringent import restrictions. Reserves fell — although slightly — to $13.59bn from $13.76bn on a week-over-week basis. Even Moody’s decision to cut Pakistan’s sovereign credit rating on its increasing external sector vulnerabilities after the floods has failed to stop the rupee’s rise. Moody’s believes that the economic losses of $30bn inflicted by the floods have raised fears of a much wider current account gap than projected in the budget and increased Pakistan’s foreign financing needs.

Meanwhile, global oil is bouncing back on the output cut by Opec Plus after a brief fall in price. The only positive economic development has come in the form of commitments from multilaterals of additional funds of $3.8bn and pledges of $816m by friendly countries to help Pakistan in its post-flood reconstruction effort. No wonder most experts believe that the present trend seen in the foreign exchange market is ‘unsustainable’ and will be ‘short-lived’, and that the rupee will soon resume its downhill journey as the economic fundamentals remain weak.

Read: Daronomics — The fallacy of fixing currency price

Ishaq Dar, who is seen by the market as an interventionist advocate of a strong home currency, has, nevertheless, again predicted on a TV show that the exchange rate would settle to below 200 to a dollar in a matter of days, and not weeks, which will reduce the nation’s public debt (in terms of the rupee) and tame the imported inflation. His optimism stems from his belief that the home currency had weakened over the last few months due to speculative attacks, and that it is now headed towards its ‘true worth’.

Like his predecessor, Miftah Ismail, he also blames the big banks for manipulating the exchange rate to make quick money. The banks are said to have made Rs27.67bn in the first three months of the present fiscal to September from their foreign exchange business against a full-year profit of Rs37.88bn during the entire last fiscal. A probe is underway.

Indeed, the biggest challenge facing the government is the stability of the rupee. The problem that became more serious after the restoration of the stalled IMF programme failed to end the market volatility needs to be dealt with to end the growing economic uncertainty. But whatever happens, Mr Dar should avoid interfering with the market forces or we may soon find ourselves in the midst of a deeper crisis.

Published in Dawn, October 9th, 2022

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