The PKR plunge

The PTI government's decision to seek a bailout package from the International Monetary Fund (IMF) led to a massive erosion of the rupee value in a single day, estimated at around 9 percent, sending shivers in the Pakistani currency market. The obvious reason for the erosion of our currency is attributed to the IMF press release dated 4 October, on the conclusion of Article IV consultations, in which it maintains that "Pakistan is facing an increasingly difficult economic situation, with high fiscal and current account deficits and low international reserves. This mostly reflects the legacy of an overvalued exchange rate, loose fiscal policy and accommodative monetary policy... The (IMF) team welcomes the policy measures implemented since last December" including "18 percent cumulative depreciation of the rupee," and argues that "policies should include more exchange rate flexibility." In other words, the currency market reacted to the news of the country seeking an IMF package with the certainty that the rupee would further depreciate to reach its market value as either a pre-programme condition or a structural time bound benchmark as a component of the programme itself.
The IMF allowed the then Finance Minister Ishaq Dar to keep the rupee artificially overvalued during the three-year Extended Fund Facility (September 2013-2016) - at one time noting that it was overvalued from 5 to 20 percent - but never made this a structural benchmark for a tranche release. The result is evident for all to see: a decline in exports as our products became less competitive, a rise in imports as they became more attractive (though imports under China Pakistan Economic Corridor (CPEC) also contributed to a higher import bill) leading to a historically high current account deficit. Dar relied on external borrowing to shore up foreign exchange reserves that in turn helped to intervene in the market to keep the rupee overvalued; and as and when concessional borrowing from abroad became a challenge, after the country completed the IMF programme and abandoned reforms, heavier reliance was placed on borrowing from the external commercial banking sector at higher interest rates and short amortization periods. In other words, reliance on this short- term debt accounts for the decline in the average time to maturity of external debt from seven years four months to eight years while in 2013, the time to maturity was 10 years.
Today the situation is dire. Foreign exchange reserves have dwindled to less than two months of imports, and therefore there is not enough in the kitty as reserves that would enable the State Bank of Pakistan to intervene in the market to defend the rupee value. The Tuesday rupee erosion alone accounts for an addition of 900 billion rupees to our debt bill (depreciation of one rupee against the dollar adds 100 billion rupees to public debt) which, in turn, will play havoc with the already unsustainable budget deficit.
The situation is all the more disturbing as according to a Public Debt Management Risk report dated June 2018 Pakistan's short- and long-term debt maturing in the current year had increased to 80.6 percent of the total liquid foreign currency reserves by June 2018 in comparison to 27.7 percent the year before. Tuesday's depreciation would further add to the cost of the short- and long-term maturing debt.
Be that as it may, the PTI administration had no option but to go on an IMF programme as earlier optimism about generating foreign exchange support from friendly countries, particularly Saudi Arabia, the UAE and China, has evaporated as has reliance on the Prime Minister's call for assistance by the Pakistani diaspora. The actual contribution to lowering the current account deficit by the rupee depreciation is estimated at 1.5 billion dollars in higher exports and one billion dollars in lower imports or in other words, a beneficial impact of 2.5 billion dollars on the trade deficit. However, the rise in foreign debt repayments for the current year would be in excess of 6.4 billion dollars in the event that the rupee further depreciates to 140 rupees to the dollar as is being projected. Thus the country's need for higher borrowing and/or higher foreign direct investment as well as the issuance of diaspora bonds would simply rise.
The PTI has consistently maintained that its policies designed to deal with the crisis will try to protect the purchasing power of the poor. That now appears to be wishful thinking. The rupee erosion would compel the government to raise petrol prices, as the IMF programme would without doubt limit subsidies, thereby raising the cost of transport and impact on the price of perishables; and prices of items like tea and cooking oil would rise as these are imported items. As an official of the Finance Ministry told Business Recorder, the depreciation would raise external debt and budget deficit as well as inflation and the cost of doing business.
Complaining that the PML-N is responsible for the critical state of the economy maybe correct; however any political party seeking to form a government is expected to have a game plan up its sleeve. It is now up to the government to seek to resolve all issues. Dithering and misplaced confidence to recruit benefactors left the government no option but to go on an IMF programme or face the prospect of default that would have made us a pariah in the financial markets. The recovery is going to be a painstakingly slow process and there would be many a slip before the country begins to turn towards recovery. It is about time the PTI government realized that blaming previous governments for all the ills that the country faces cannot be a justification for absence of viable solutions to correct course and move on. The sooner it transits from campaign rhetoric to competent governance the better will the people of Pakistan be served.