Depreciating rupee

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Balance of payment crisis and dwindling foreign exchange reserves have plunged the rupee to a record low of Rs 142 against one US dollar.

The episodic jolts that have rattled the economy since July through these marginal depreciations are now adding up to present a clearer picture. The revival of growth touted by the previous PML-N government as its signature achievement is no different from preceding growth spurts seen by the country, most recently in the Musharraf era, in that it was unsustainable. In both cases, what we saw was a short-term boom procured through large injections of foreign capital, whether through borrowing, aid or foreign investment, that depletes the reserves and weighs on the fiscal balance.

In this case, the growth spurt was not even as massive or broad-based as that of the Musharraf era. The government continued to cling to the hope that the spurt of Chinese investments that entered the country during its tenure would somehow breathe new strength into the external account. Yet, this sounded increasingly like a futile expectation.

Moreover, the development only comes a day after Pakistan Tehreek-e-Insaf government presented its 100-day performance. The devaluation is set to cause an increase in inflation and interest rate, affecting investment in the country. It is expected that the government will expedite talks with IMF for a bailout package. The economy is crumbling, swift steps are needed, the cost of production is likely to go higher, damaging the local producers as well. Meanwhile, traders are increasingly concerned that neither Mr Khan nor his Finance Minister Asad Umar has laid out a comprehensive plan to address the country´s economic woes. Since it has been more than a week after the negotiations with the International Monetary Fund ended without a much-needed bailout agreement, the state is obligated to present its course of action. Me Khan needs to understand that the highly publicisedausterity drive is symbolic and will not solve the economic woes of the country, swift efforts are needed or the situation is deemed to get worse. Yes, the previous governments have brought us to this point, but investors’ eyes remain on the prime minister to provide them relief through some concrete plan.

The PTI’s austerity agenda without the correlation of economic growth, the policies are likely to be in vain. The SBP will need to ensure money supply is controlled without keeping money supply in check, there is a risk that the inflation could go into overdrive and the situation of the economy will worsen.

 

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