Time for caretakers to take care of rupee

They must come up with out-of-the-box solutions as economic depression looms

KARACHI:

Enough is said about the consequences of Rs50 drop in the currency’s open market value in less than two months from Rs280 to Rs330 against king dollar.

While a hurriedly conducted press conference was more of a message to the IMF about adhering to the plan, the nation is again undergoing tremendous amount of depression, pessimism, hopelessness and uncertainty.

Nevertheless, there are certain actions that may be considered to slow the pace of worthlessness of Pak rupee.

One) Immediately increase US dollar returns on Naya Pakistan Certificate by 2-2.5% from 7-8% to 9-10.5% per annum for short term.

The net addition of dollars has materially declined since global interest rates have increased by 5%. Overseas Pakistanis must be tapped and lured to plug in the deficit with short-term debt inflow, albeit slightly pricey.

Two) Increase the remuneration rate on US dollar accounts by introducing a product for domestic dollar holders (not an amnesty) to encourage them to park their dollars legally instead of excessively churning them in a speculative market at 9-10% interest per year.

Non-filers of tax returns can get lower returns or probably would end up selling to filers who can deposit it back with formal institutions, anyways.

Three) Recently approved incentives to increase remittances need to be further enhanced with immediate effect to reduce the spread between dollar pricing in open and grey markets and encourage the use of banking channel to incentivise banks and overseas residents with competitive exchange rates.

Four) Strict action must be taken by authorities against exchange companies engaged in non-compliance with rules and they should further tighten the rules.

People not travelling abroad nor remitting for educational reasons must not be allowed to buy dollars or other currencies at all. Greenback falling in the hands of retail speculators is the worst-case scenario.

Five) Exporters should be prioritised for opening import Letters of Credit. In fact, commercial banks should be encouraged with an incentives structure and a product list clearly calibrated with extensive research by economists about products with US dollar multiplier effects.

Give due urgency to $1 of imports that leads to $2-3 worth of exports in short to medium term.

Six) There should be speedy execution of foreign direct investment plans that can offer upfront dollars (under SIFC) or otherwise. It is extremely vital now to attract US dollar investment come what may.

Decline in remittances is partly attributed to the crash in real estate market. If overseas investors are offered tax incentives for real estate development (not “plotistan”), the needle may move.

It’s pretty worrying when common chatter in offices, streets, WhatsApp groups and family dinners is about buying dollars, dirhams and riyals.

Grey market can only be given a decisive message when the currency trend reverses. Currency depreciation must never be more than half the rate of domestic interest rate to discourage speculation. Write it on the walls of federal cabinet (literally).

With marginal fiscal cost, exchequer can shield impact worth trillions of rupees on the country’s balance sheet and people’s purchasing power.

White flag is just not an option, especially if people start comparing if we were better off defaulting as in the case of Sri Lanka. Their interest rates, inflation, currency and stock market are doing better than Pakistan’s. Default threat is over, but economic depression is looming.

The writer is an independent economic analyst

 

Published in The Express Tribune, September 4^th, 2023.

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