The dollar drone

Published: November 26, 2013

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The rise and rise of the dollar vis-a-vis rupee has turned it into a drone of the lethal kind. From Rs99.58 at the start of the current fiscal year, a dollar’s worth had risen to Rs109.6 at the time of writing this piece. As it rises, imports become expensive, repayment of foreign loans and interest payments require more rupees, at a time when the economy is on the downhill. Oil and food comprise 46 per cent of our imports. These are essentials that cannot be reduced, not in the short run, at least. In the first quarter, foreign debt increased by 390 million dollars. A hefty sum of 1,403 million dollars was repaid as principal, 188 million in interest and 157 million repaid in short-term debt. Total debt stock increased by Rs1,129 billion. Monetary expansion has been caused mainly by the government borrowing from the banking sector. As a result, the return of double-digit inflation is unstoppable. The latest Sensitive Price Indicator, for the week ending November 21, tells as much; it stood at an annualised rate of 15.5 per cent. Food prices are leading the charge. A closer reading of the agreement with the IMF reveals that controlling inflation is not its objective in the first year. It aims at building up reserves and letting the exchange rate find its true value.

In theory, depreciation of the rupee means that exports become cheaper and hence, attract more foreign buyers leading to larger earnings of dollars to support reserve accumulation. Textiles, with a declining share in world trade, provide 56 per cent of our exports. Some textile items have done well but import rigidity left a trade deficit of 4.43 billion dollars in the first quarter, up from 3.66 billion dollars in the comparable period last year. Expensive imports rose faster than the cheaper exports. Remittances from overseas Pakistanis of 5,276 million dollars in July-October, an increase of 6.3 per cent, helped. But this was not enough to contain the deterioration in the external accounts. Foreign direct investment is very low. All told, there is a net outflow in the financial account. The very recipe imposed by the IMF to build reserves by buying dollars from the market pushes the value of the rupee down.

The State Bank of Pakistan (SBP) has increased its policy rate and yet, the stock market is rising. This is giving a false sense of confidence to the finance minister and his team. They do not see the hot money movements behind it. Even the SBP, which was selling dollars before the agreement with the IMF, reads a speculative sentiment in the exchange rate volatility. However, the problem is that by leaving things to the exchange rate, the SBP and the government have lost control over the economic levers. They have now no option but to demonstrate that they can accumulate reserves at a level that will beat the market to gain its confidence. On November 13, these reserves were only 3,645.8 million dollars. Going to the IMF was sold as the only source of urgent reserve accumulation. By front-loading its conditionality, the IMF has actually contributed to the lack of confidence in the rupee. One window is still open: a policy of selective import compression and intelligently devised capital controls to achieve what non-tariff barriers achieve, say, for India can conserve foreign exchange. It need not be overstressed that the policy so conceived departs from the accepted text. Failure to do so will, however, aggravate the havoc resulting from an agreement negotiated by economic simpletons.

Published in The Express Tribune, November 27th, 2013.

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Reader Comments (10)

  • MSS
    Nov 26, 2013 - 11:30PM

    Pakistan needs to learn to live within its means. Defence spending needs to be cut by at least by 30% from current levels and development budget increased. What is needed is the will to manage finances better. Learn from Bangladesh a country thought of as a basket case a few years ago. In spite of starting from a much lower base than West Pakistan, they are doing much better and one day will leave Pakistan behind.


  • Asad Khan
    Nov 27, 2013 - 12:44AM

    ….and it remains the basket case, it shine only cuz Pakistan plummeted more from its previous high ground, due to power shortage / law & order most of the textile gone to Bangladesh.

    Instead of cutting defense budget, just get rid of circular debt, stop giving massive bailouts to government lost making corporations, privatize them, these measures are more than enough to ease the pressure on rupee immediately, what is required is the political & moral will.



  • LoyalPakistani
    Nov 27, 2013 - 3:15AM

    IMF policies are killer for this country, it is like a death wish for the coming decades, politicians need to control their personal greed


  • Nov 27, 2013 - 5:38AM

    Indeed IMF loans are nothing but killers of nations. They increase poverty, unemployment and inflation.The stupid rulers of this country are sold-out as well to the banking lobbies abroad. No matter what the government does nothing will go positive till the interest shackle remains.
    Interest is forbidden in Islam, and who can understand finance better than Allah?
    I have written about them in my blog for the ones interested in knowing more.


  • numbersnumbers
    Nov 27, 2013 - 7:44AM

    Curiously lacking anywhere in either the article or the resulting comments is the elephant in the room!
    There would be little need for IMF support of Pakistan IF AND ONLY IF the government would finally do something about the abysmally low Tax-To-GDP ratio that dooms Pakistan to failure!!!
    With tax avoidance by the usual suspects (agricultural sector, businesses and SUPER WEALTHY ELITES) being a sport of Olympic stature in Pakistan, there is nothing to stop the country from financially Circling the drain!!!


  • Nov 27, 2013 - 8:28AM

    IMF Loans and the string polices are quote OK if the recipient nation knows how to use them India has borrowed heavily from IMF and we have used them to spur our economy ion the late 80s to where we are today. Blaming your Banker for tough loan conditions is stupid. Use the money wisely, make the changes required and you can grow your economy.


  • meekal a ahmed
    Nov 27, 2013 - 1:32PM


    What is “selective import compression”?

    You want to use administrative means to contain imports?


  • Nov 28, 2013 - 7:55AM

    dr.pervez: yr article is right at crucial stage where economy is put behind back burner v/s
    social personal pleasure. Consumers lost complete faith, ALLAH MAAF kare, now our Minfin himself said to IMF tt below poverty level increased fm 40 to 50% , pls stop all eatable items exports, like potato,tomato, onion, cattle, meat, sugar, wheat flour, vegetable and fruits, concentrate hvly on tex, as B.D. importing fm us cotton, yarn, cot.tex & export made up garments toUS$12 bn why we cannot, BD is btr performing than india also in terms of GDP, example are more see dubai, K.L. s’pore, Japan , except KL all hv no raw materials but thriving. Also we hv under utilized fertilizer sector, if proper attn is paid we become exporters, also fast growing sun flower, which save import of palm oil, fast growing all pulses, grams, oil seeds, where less water is used, convert sugar cane plantation to fast growing other items as sugar use hvy water, convert sugar plants into fertiliser or other hi tech chemical items as did by cuba, brazil, phillipines.


  • Babu
    Nov 28, 2013 - 4:49PM


    Babu is rubbing his plams and salivating to get the power and authority to distribute import quotas. Can we pls hurry up.


  • Ali
    Nov 29, 2013 - 10:50AM

    If Govt. of Pakistan cuts extra expenses and pays tax firstly from own pocket.No doubt, we will take out our economy from crisis.Currently, Ireland take out his economy from financial crisis of Europe by simple formula of cut extra expenses.


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