The wrong remedy

What matters more is that whatever rate the rupee is at, remains relatively stable over extended periods of time.

Finance Minister Ishaq Dar’s pronouncement that the government would try to bring down the exchange rate from its current point to Rs98 to the US dollar is at once an exercise in laughably unrealistic populism and dangerous policy priorities. While the depreciation of the rupee is indeed a problem, trying to get the exchange rate down to an arbitrary number would be a fantastic waste of government resources and a luxury that the Pakistani people cannot afford.

A fundamental rule of the global currency markets is that actual nominal exchange rates matter far less than their stability relative to their peers. Simply put, it matters far less whether the rupee is trading at Rs98 to the US dollar or whether it is trading at Rs110 to the US dollar. What matters far more is that whatever rate it is at remains relatively stable over extended periods of time. For over five decades, one needed a lower number of rupees to buy one dollar than Japanese yen. That fact did not make the Japanese yen a ‘weaker’ currency than the Pakistani rupee. It is true that the Pakistani rupee has depreciated significantly over the past few months and many observers, this newspaper included, have raised alarms about the possible inflationary effects of such depreciation. But the way to counter this is not to get the rupee back to where it started, but simply to secure enough reserves to ensure that the currency does not depreciate any further.

For all the talk of the PML-N being a ‘pro-business’ party, what is often lost is that Prime Minister Nawaz Sharif’s second term in office was actually one of the worst in the country’s history for foreign investors and Pakistanis who kept dollar deposits in local banks. We sincerely hope that the government is not set to repeat its worst mistakes from the late 1990s. The finance minister is poorly defining the government’s priorities. The country does not need a ‘lower’ currency exchange rate. It just needs a more stable one.

Published in The Express Tribune, December 7^th, 2013.

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