Letting rupee depreciate

With a widening trade deficit, Pakistan is set to see a weaker rupee in the coming days

After a long run of stability, the Pakistani rupee finally witnessed the pressure everyone, but the government, had admitted it had. Independent economists as well as global lenders — including the ones the government loves to quote whenever a positive emerges from within the economy — had said that the rupee was artificially being kept stronger and needed to be let go off the tight noose.

It eventually did on Friday, albeit very little. It depreciated 1.42%, or Rs1.5, to become Rs107 to the US dollar in the inter-bank market on Friday. Many still say that the rupee can go further down to Rs115 by June 30, 2018.

So why now and why this way? This is because the PML-N — read Mr Ishaq Dar — was exhausting official reserves in keeping the rupee strong by pumping dollars whenever the currency would witness pressure. While it built official foreign exchange reserves, the increase came on the back of extremely high levels of borrowing and the bailout provided by the International Monetary Fund (IMF). It did not come on the back of increasing exports or remittances. Imports did not go down as much as they could have, given the low oil prices, and the government did not find new avenues to earn dollars.

The deliberate delay and energy it took the government to keep the rupee strong has eventually started to take its toll. Loss-making state-owned enterprises continue to bleed like they did in 2013 and tax rates have only increased on those who already paid them. Confidence in the economy is a lot less now than it was in 2016 and investors are wary of election year.

With a widening trade deficit, which shows no signs of slowing down, Pakistan is set to see a weaker rupee in the coming days. What measures can the government take to keep the currency strong is anybody’s guess. Keep borrowing because structural issues within the economy — promotion of exports, returning refunds and finding new markets — is too hard, in comparison.

Published in The Express Tribune, December 10^th, 2017.

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