Debts and deficits

If the purpose of the IMF is to deter the government from borrowing by raising its cost, the idea seems self-defeating

Dr Pervez Tahir June 28, 2019
The writer is a senior economist. He can be contacted at [email protected]

On Wednesday this week, the interbank rate of the dollar shot up from Rs156.98 to 161.5, or by almost three per cent, in just one day. So far in this month, the price of the dollar has gone up by 9.6 per cent.  When the IMF mission chief arrived in March, the soothsaying Asad Umer said nothing about the Ides of March. The rupee depreciated by 0.5 per cent in that month. Come April and Asad Umer was saying, “Et tu, Brute?” The average rupee depreciation was 1.4 per cent in April and 3.1 per cent in May. As I write, there are four more days to go for this month of rising dollar, dubbed seasonal by no less than the SBP Governor. As per data, July reflects more seasonality than June, at least for 2017 and 2018. The secret is out by now that the SBP’s inflation targeting is accompanied by reaching an exchange rate target agreed with the IMF as a front-loaded condition by the end of June.  The governor’s textbook reading of avoiding free as well as dirty float in favour of a market-determined exchange rate was hogwash. The market players sense the target at Rs65 for a dollar. This would make the monthly adjustment higher than the second highest in our history i.e. 11.1 per cent in February 1973. The highest -- 56.7 per cent – happened in May 1972. In the SBP textbook, these are perhaps not the ‘disorderly market conditions’ justifying intervention.


While the uncertainty associated with the exchange rate manoeuvring leading to volatility in the name of the market determination may end after the approval of the IMF programme at its executive board meeting on July 3, the far-reaching consequences of the developments so far are already constraining the economic future. Explosive debt accumulation is high on the agenda of the government. It has gone to the extent of setting up a Commission of Inquiry on the pros and cons of the debt contracted since 2008. The present exchange rate policy is rapidly increasing the debt-servicing burden of the existing debt. Every time the dollar price increases, the external debt servicing in rupee terms increases in equal proportion. The system is already stuck in the so-called debt trap – borrowing more to service past debt rather than for new projects and programmes. A key objective of depreciating exchange rate is to boost exports. At best, the policy has contained the declining trend of exports, which prevailed despite the GSP-plus status in the EU. However, exporters are more worried about losing the zero-rated privilege in the sales tax regime than about improving competiveness. Improvement in the current account of the balance of payments has resulted largely from the restrained imports. Even here, the exporters complain about the increased cost of the imported inputs.

Now the amount of external debt and its servicing are far less than the domestic debt. The difference is that the government can ask the SBP to print paper currency to repay the domestic debt, but the dollars have to be earned or borrowed. Under the IMF conditions, this difference has been done away with. The government has been barred from borrowing from the SBP. It has now to depend on commercial banks and other sources. Even here, the cost of borrowing has gone through the roof, given the galloping policy rate that is another condition precedent of the IMF programme. If the purpose of the IMF programme is to deter the government from borrowing by raising its cost, the idea seems self-defeating.

Published in The Express Tribune, June 28th, 2019.

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