In the entire fiscal year 2012-13, the depreciation was 5.1 per cent. What led to the dollar on the wing? The explanation coming from the government is that speculators are the culprits. Some measures were taken to restrict import of gold but to no avail. Speculation made partial sense when the State Bank was selling dollars in the market to stabilise the exchange rate. Sensing a troubled rupee, the market would want the State Bank to do more. Since the agreement with the IMF, however, the State Bank has been doing the opposite. It has been buying dollars in the market to build reserves. For some odd reason, the former is described as intervention in the working of the market forces, but the latter is not. It may be that some foreign banks and multinationals are indulging in arbitrage by buying dollar-rupee forwards locally and selling them offshore. To some extent, the spot rate in Pakistan may be influenced by the high forward rate resulting from the increased demand for it.
The State Bank has given several of its own explanations at various times. At the global level, it was attributed to the expected tapering-off of the quantitative easing by the US Federal Reserve that would adversely influence the flow of capital to emerging markets, including Pakistan. This did not happen. It was said that the balance of payments is under stress because of higher debt servicing and repayments to the IMF. The agreement with the IMF, according to the finance minister, was made to borrow from the IMF to return its money. Post agreement, the stress should have decreased rather than increase. The emphasis is on boosting up reserves. Besides the $125 million picked up from the market as a prior condition of the IMF, the IMF’s first tranche, $133 million from the Islamic Development Bank and currency swap with China valued at $1.6 billion and some access to the market, the scramble continues.
The State Bank governor also maintains that the fall of the rupee is due to the market forces, not the IMF loan. The agreement is clear in ensuring that the emphasis of policy, to begin with at least, is on rebuilding foreign exchange reserves, not inflation. “Reserve losses exceeding $500 million in any 30-day period during the programme will trigger consultation with the IMF Staff”, says the agreement. In the language of monetary economics, the monetary policy is now anchored in exchange rate, not interest rate. This means inflation has been left not just to market forces, but to the vagaries of global market forces. All the adjustment must come though the costlier imports and debt servicing, as exports have been failing to pick up. There is nothing in the hands of the monetary authority to cushion the rupee. Where will it stop, only God and the IMF know.
Published in The Express Tribune, September 27th, 2013.
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@Saeed: We got the first part which is called Democracy. The second part is check and balance system by passing the laws in the parliment. Till that time , democracy alone can not help. This is a learning experience for every body.
Alas! there was a time when dollar fell from 66 to 60. Then came our beloved democracy.
Blame it on market forces, speculators, dwindling reserves but comparatively India has huge reserves and so does the US then why dollar has been in a structural bearish trend for the last 10 years?? India has huge reserves but Indian Rupee has taken a big hit - perhaps in the case of India one could argue unwounding of the carry trade, but the empirical evidence shows that country's exchange rate reflects its economic fundamentals!!
Our speedy deterioration of economic fundamentals and burgeoning national debt are the factors behind falling value of Pak rupee...
Produce more quality goods that can be exported. The desired change will come.
The Pakistani Rupee will be the next Zimbabwean dollar. * gulp *