The rupee slide

While analysts attribute the rupee’s slide to political instability, we must remember a broader view of the economy

The crashing value of the rupee is worrying all and sundry, with major industrial groups now complaining that the continuous fall is hitting their ability to produce goods. Having to do with the Ukraine war impact on oil prices and carriage costs, these groups were also missing out on the heavy subsidies granted to export-oriented industrial units; and now, with rising cost of inputs due to a weakening rupees, they will have to raise prices to break-even, leaving local consumers to either bear the cost or stop buying. Either way, the impact will be more inflation and lower profitability. If people stop buying local products, it could also lead to increased unemployment. But this is not to say that export-oriented industries have not also been affected — their input costs are also rising significantly, which is eating into their profit margins. Meanwhile, the country’s e-commerce sector, which is heavily reliant on imports, is also taking a hit as disposable incomes fall.

While some analysts attribute the rupee’s continuing slide to political instability, we must remind that a broader view of the economy over the past few months shows no evidence that the rupee would have strengthened had the noconfidence movement never happened. At best, the slide may have been slower. Keep in mind that currency experts had been predicting — long before the March crash — that the rupee would fall to the Rs180 to Rs185 range by the end of the current fiscal year. As if there were not enough dollar headaches, foreign reserves are now at their lowest levels since the summer of 2020, dropping to around $12 billion. The State Bank of Pakistan attributed the almost $3 billion decline in a week to the repayment of external debt, which would be fine if only this were an irregular occurrence, and we were to forget about the mountain of debt that is still to come due in the coming weeks and months.

At the same time, some analysts have noted that some commodities have seen their prices rise disproportionately despite only being nominally affected by devaluation and supply factors. While the evidence is somewhat anecdotal, it is another reminder of the unchecked proliferation of profiteering.