Fresh depreciation

The latest depreciation of the rupee by as much as 4 per cent against the dollar is nothing but a confirmation of our macroeconomic imbalances that had fuelled instability fears in the face of higher growth rates. The fall has been described as a market-driven measure but there is little doubt it was caused by the central bank’s intervention — the second in more than three months. Last December’s rupee depreciation was caused by the widening current account deficit and decline in foreign exchange reserves. Like previously, the State Bank of Pakistan on Tuesday withdrew support for the rupee following the buildup of payment pressures. But interestingly the development came within days after the government ended a post-programme monitoring talks with the International Monetary Fund (IMF) just like in December 2017.

For the past several weeks the government had been told that the rupee was overvalued. To set things right and improve the country’s external account, currency depreciation was deemed unavoidable. So the government decided to take the plunge rather than wait another few months by which time the next election would be due. This will give it some room to wiggle out of unpopular measures such as turning to the IMF again or loosening the currency peg.

For the sake of our economic managers, let us hope Pakistan’s exports swell long enough to sustain the foreign reserves and ultimately stave off a bailout of any sort.

Now that another depreciation has occurred, there are market expectations of an increase in the key discount rate by at least 25 basis points to 6.25%. The latest depreciation is set also to increase the country’s external debt burden. And Pakistan will need to fork out more rupees to service that debt.

Published in The Express Tribune, March 22^nd, 2018.

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