Crashing rupee

Rupee continues to fall against the USD and has seen the lowest of all times


July 28, 2022

The rupee continues to spiral downwards, hitting a new record low of almost Rs233 against the dollar, as foreign currency supplies also dwindle. The crash is even more pronounced because the government has been assuring the market that the staff-level agreement reached with IMF will keep the country afloat for the rest of the fiscal year.

While some experts are blaming political instability and low reserves for the problem, this is an oversimplification. Both of these problems do have an impact, but they are essentially only aggravating much bigger problems with the economy that have existed for decades and went into overdrive during the Musharraf era. Other experts have looked at regional events and pointed to parallels with the currency speculation-driven 1997 Asian financial crisis, which wreaked havoc in Southeast Asia a quarter-century ago. They are far more on point, identifying the role of ‘hot money’, crony capitalism, and excessive real estate speculation among the ailments afflicting South Asia’s economies today, while also pointing out that no South Asian economy is robust enough to sustain the impact of a 1997-level shock.

Earlier this month, the ratings agency Fitch downgraded Pakistan’s credit outlook from ‘stable’ to ‘negative’, and while the default rating remains unchanged, Fitch also warned of increasing pressure on dollar-denominated bonds and the stock market — both of which tie back to the problematic capital market-driven growth since the Musharraf era. This is because ‘considerable risks’ to the implementation of the IMF programme remain, along with question marks over continued access to financing after the programme’s expiry in June 2023 in a ‘tough economic and political climate.’ Fitch also referred to former prime minister Imran Khan’s calls for early elections and “organising large-scale protests in cities around the country” as destabilising factors that “could undermine the authorities’ fiscal and external adjustment.”

Unfortunately, with Imran unlikely to take a step back in the interest of the economy, the government may be tempted to fall into the trap of another identified risk — rolling back the painful but necessary reforms that have opened the door to foreign financing.

 

Published in The Express Tribune, July 28th, 2022.

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