June Issue 2019
The Downward Spiral
On May 15, currency markets were abound with speculation that the price of the dollar was set for a precipitous hike. Over the weekend, the Pakistan government had agreed to a $6 billion three-year extended bailout deal with the International Monetary Fund (IMF), a condition of which was to let the market dictate the rupee’s worth, which it did, over the course of the following two weeks.
The dollar’s rate, which had hovered between Rs 139 and Rs 141 for most of the year, was being sold at around Rs 144 in the open market by the evening of May 15. When I asked a leading forex dealer why they were selling the dollar at Rs 143.9 when the interbank rate was still between Rs 142.1 and Rs 142.7 that day, he replied, “This is nothing – just wait and watch what happens tomorrow.”
On cue, the open market exchange rate crossed Rs 146 on May 16, while the interbank rate was still Rs 141, reflecting an unprecedented five rupee disparity between the two.
The State Bank of Pakistan (SBP) confirmed that the open market was determining the price. “The exchange rate in the interbank market closed today at Rs 146.52 per USD from yesterday’s close of Rs 141.40,” said an official message sent out by the SBP on May 18. The remainder of the month of May would see the rupee plummet to 154 against the dollar, eventually settling around Rs 150 against the US currency by the end of the month.
This plunge to Rs 150 reflects a 43 per cent slide in the rupee’s value over the past 18 months. The rupee slid from 105 in December 2017, to 115 by the time the Pakistan Muslim League-Nawaz (PML-N) tenure ended in May 2018. It was under the PML-N’s Miftah Ismail and Rana Afzal Khan that the rupee began its revaluation, after their predecessor, Ishaq Dar, had kept the value between 100 and 105 with the help of the SBP’s regular dollar influx into the market.
Under the caretaker government, the central bank further retracted its interference in the market as the rupee’s value readjusted to 128 on July 25, the day of the general election. Since the Pakistan Tehrik-e-Insaf (PTI) government took charge, and despite repeated insistence by the then finance minister, Asad Umar, that he would not go to the IMF, the currency was gradually allowed to fall in accordance with the conditions set during the negotiations with the IMF.
In April, Umar was replaced by Abdul Hafeez Shaikh, who was appointed the Prime Minister’s Financial Advisor, precisely to streamline the bailout talks with the IMF. Once Shaikh took charge to sort out the IMF deal before the budget announcement, the rumour mill was working on overdrive with many predicting the rupee to fall as low as 200 against the US dollar by the end of the year.
“It is that speculation that is driving the rupee down,” notes the former government spokesperson on economic issues, Dr Ashfaque Hasan Khan. “Neither the IMF’s press release, nor any government statement reveals the details of the agreement,” he adds. “Mission chiefs normally hold a joint press conference to reveal the details, [but this] hasn’t happened. So when the market has no idea what the deal is, it is obviously interpreting the developments itself and reacting accordingly.” He believes that the government needs to have a more transparent communications strategy on economic matters.
“What we do know is that the government has agreed with the IMF that the exchange rate would be market-determined,” Khan continues. “As things stand, it’s a staff level agreement, which will be enacted once we meet certain targets through prior actions. So both parties know the exchange rate that needs to be reached before Pakistan’s bailout deal would be sent to the IMF board for approval.”
Malik Bostan, President of the Forex Association of Pakistan, has expressed his intention of helping the government deal with the foreign exchange crisis. “We’ve tried to help every government in the past,” he says. “We are not affiliated with any party, we want to help Pakistan. This is why we’ve given around $1.2 billion to the current government so far, since August. We want to play our role in helping the government deal with the crisis. The exchange companies usually give $1.5 billion to $2 billion to the government, while bringing $5-6 billion from overseas annually. We want to increase these values,” he adds.
“Pakistan doesn’t lack foreign exchange. What it lacks is management. Over the past 23 years, $160 billion have been sent overseas from Pakistani banks. That means that there is no shortage of foreign exchange in the country,” Bostan continues.
The rupee plunge has resulted in rising inflation. At 9.4 per cent, the inflation rate is at a seven-year high; it was 3.2 per cent 15 months ago. This has meant that prices of commodities, including electricity and gas, have increased across the board. A further Rs 12 per litre hike in petroleum price is likely after Eid, following recommendations of the Oil and Gas Regulatory Authority (OGRA).
The multi-pronged economic crisis has been taken up by the opposition parties as the core of their attacks against the government. The PML-N is planning mass protests against rising prices after Eid. However, the PTI leadership maintains that the ongoing economic turbulence is owing to the policies of the previous governments, and that the incumbent government will overcome the problems over the next couple of years.
“The IMF document says that the current economic situation in Pakistan – Rs 30 trillion in debts, a current account deficit of $19 billion, which has now been reduced to $12 billion, and an overvalued rupee – [led to] conditions [that] necessitate an IMF bailout,” says Humayun Akhtar, a PTI leader and former federal minister for trade and commerce, adding, “The IMF helps make the situation better.”
According to Akhtar, “The IMF will address the fiscal account deficits, the current account deficits and the out-of-control expenses like the circular debt and public sector enterprises. Unfortunately, that’s the only language we understand. We need the stick to get things in order. It will take another two to three years to stabilise things,” he adds.