Tragedy of Rupee VS Dollar
By M Bilal Awan
Mr. Cod happens to be an ‘economy freak’, who has been trying really hard to apprehend me with his ‘invincible findings’ since last week—which he often does. To him, devaluing currency is inevitable for ‘keeping the banner flying’. Yes, you heard it right: ‘Devaluing currency is good for country’s economy’!
In fact, according to him, that let the country to make progress by leaps and bounds.
Being a fiscal bug, he keeps himself updated head and shoulders, all the time. As of him, the former Finance Minister Mr. Ishaq Dar’s economic adventures could’ve laid eggs, if given enough time, and rather would have ‘boomed’ the economy. He doesn’t want to discuss Miftah Ismail’s 34-day adventure in Finance Ministry—essentially he has a bone to pick with him. He calls the caretaker Minister, Ms. Shamshad Akhtar, as a make-shift, whose part is no more besides playing a mere stopgap.
While I listen to this, I keep my head nodding in submission mode and remain as quiet as a grave.
My friend has a natural gift of gab and he can conveniently steal a march upon rest on his day—sometimes at the cost of depriving others from using their right to pitch opinion or to show contradiction—God forbid (don’t try this at home).
There he comes. He snuggles into a sofa and inhales smoke from a thin weird cigarette that I never found between normal cigarettes.
“Money makes the mare go my friend”. He started talking. ” but in Pakistan, the equation is a little different”…He closed down the tips of his thumb and index figures to show how little the equation might get. “a lot of money makes the mare go”. Then a nonstop stint of revelations tacked together.
He revealed that the last time the State Bank of Pakistan (SBP) devalued the currency was deliberate, essentially a ‘part of a master stratagem.
“Try to understand that the overvaluing of money would mean less exports, trade deficits and looming sovereign debt burdens”. He was getting carried away with his trade-mark emotionalism, tout ensemble.
“China is a smart dude”. He excitingly announced. “It has been devaluing its currency over the years to take undue advantages over other countries, this means more exports. As a rule of thumb, more valuable currency makes exports relatively more expensive for purchasers in foreign markets, whereupon inflicting adverse effects on country’s economy. Therefore, to curb the deficit is to devalue it. Listen dude, we are living in a competitive world, where apathy is the mogul. The famous bywords of International economic model imply: if trade deficits are getting bigger, just devalue your currency; It will not only shrink the trade deficits, tout de suite, but also helps maintain the balance between exports and imports”. One, two, three breaths he took and continued. “I agree, the whole act might fire up a ‘tit for tat’ currency war, which could entice multiple countries into racing at the bottom. Just remember the mantra, oomph, stay demurely under toned and always have that ball at your feet. “He sipped through pina colada.
“Fair enough”. I reciprocated. ” it sounds pretty palatable as far as we have China for example. But how on earth would you fit ‘Pakistan’ into the same frame? makes perfect sense when China—the second largest economy in world—plays with the currency in the floating exchange market. Makes no sense when a financially hard pressed country tries to imitate. The fact of the matter is we have to devalue our currency for the foreign reserves in the State Bank of Pakistan (SBP) are hitting the rock bottom and the external deficit are increasing. Debt over last four years have soared up as well as the financial instability has wreaked havoc. Just recently, State Bank of Pakistan (SBP) lost more than $4billion of its reserves and the government had to resort to commercial borrowing–a whopping $4.4 billion— yet turned out to be inadequate to even meet the bare minimum requisites; and it goes without saying that it further ruined the building blocks of financial structure as the commercial rates are usually higher than ones offered by bilateral and multilateral sources. Dollar has jumped to 120+, the news is Pakistani rupee (PKR) will likely face ongoing depreciation pressures against the US dollar after a less than 10% downward adjustment last month. If the PKR depreciates markedly further, the country’s central bank will face the difficult challenge of anchoring inflation expectations at moderate levels. The government’s debt affordability would also likely weaken further. Now tell me what the heck is going on here”.
“Dude, you are probably missing on those $2.4 billion invested by foreign companies to increase Foreign Direct Investment (FDI). Isn’t it an epitome of a smart financial policy”. He retorted and I gazed at him.
“Well”. I responded. “How many of them are registered in the tax net? Almost half, whereupon they have made away with unmonitored profit without any transparency”.
“This is simply political crises”. He took a big fat U-turn. “I am telling ya dude, the political crises is to be blamed for the latest currency depreciation in the market. This is the real irony; we don’t just let democratic setups work”.
” The humiliation hasn’t just imposed overnight my friend. It has been going on for the last five- years. The energy sector has gone to walls, as the circular debt has surged to Rs40 billion over a time of just three weeks, touching around Rs550 billion. IMF’s first post-programme monitoring report reveals the country’s gross external debt in terms of exports in 2013 was 193.2 percent, which is expected to touch ~320 percent by June this year.
State Bank of Pakistan (SBP) has uncovered that Pakistan’s liabilities have soared 50 percent or around $31 billion in almost five years of the current government’s tenure. Few months ago, the debt servicing required on external loans were declared over $5.2 billion for the first three quarters while the exact figure of debt servicing required on over all external loans was not issued. In this time of the year, the debt servicing has now become the lonesome biggest expenditure in the federal budget, projected at $1.62 trillion or 30.7 percent for the next financial year 2018-19, and all due to the major foreign and domestic borrowing.
“Having already infested with debts, how many options do we have for the next fiscal year? more commercial borrowing means more devaluing of local currency and more appreciation in the value of dollars. Is this what we are heading towards?”
He didn’t reply and remained mum while watching the table with those gutted eyes, as quiet as a lone camel lost in the wilderness of the desert desperately looking out for an oasis.
“Mr. Cod, you said it absolutely right that this world has become an apathetic financial black hole, and we can’t remain stagnant and lifeless. But honestly speaking, only those countries can shuffle around their currency who own some economic policy. A policy that is made to achieve targets. No matter, if you either devalue or overvalue, the last thing that should be on your mind is the welfare of your motherland. You can help shrink trade deficits, cut down the cost of interest payments on its outstanding government debts and boost exports; the good intentions matter the most, they really do!
M Bilal Awan is an Islamabad based research analyst.