Currency depreciation

It is extremely worrisome for a country if its finance czar cannot himself understand how the national currency could have depreciated against the dollar by as much as 3.10 per cent on July 5, 2017 — the single-largest drop in rupee value since 2008. What is surprising is that the currency value dipped after being stable for almost three straight years. Since then, Ishaq Dar, the finance minister, has called for an inquiry into this ‘artificial’ depreciation. He has also hinted at the possibility of exploitation by ‘individuals, banks and entities’ in the wake of political turbulence over the appearance of Maryam Nawaz before the JIT probing the Panama Papers. There have been calls from exporters and others, including the commerce minister, to revise the currency rate in line with similar adjustments made by China and Turkey. The minister, however, had rebuffed these calls and judging from his current reaction he remains averse to the move.

The State Bank of Pakistan — known for both its tacit and explicit intervention in determining the currency rate through off and on instructions to the treasurers of major banks — has claimed that the depreciation would actually strengthen the country’s growth prospects and would address the emerging imbalance in the external account.

For some time now exporters have argued in favour of lowering the value of the rupee, saying this would strengthen their overall competitiveness. In the same vein the International Monetary Fund said last year that the rupee was overvalued by up to 20 per cent.

The trouble with SBP interventions is that they are at odds with the market principles of the exchange rate management. It is important, for instance, to show our creditors that our exchange rate is both stable and determined by the market. Analysts were expecting the Pakistani authorities to devalue the rupee but not quite so soon; it should have come by the year-end or by early 2018. For now the timing of the move and the identity of its author remains a mystery.

Published in The Express Tribune, July 7^th, 2017.

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