When will the rupee depreciate?

Chances of the currency falling during this government’s tenure are same as that of Pakistan winning against India in any ICC event. The question is how strong Nawaz Sharif is, and in turn Dar, to not let the inevitable happen in their regime. The general consensus is that if the PML-N leadership survives the Panama gate investigations and completes its term, the currency may depreciate by at least 5-10 percent immediately during the time of interim government followed by another 5-10 percent slow depreciation.

One may wonder how currency movement is pegged to politics as in theory foreign capital flows whilst inflation should drive it; and in a supposedly free float regime, demand and supply to determine the price—just how the stock prices move. However, dirty or managed exchange rate float is the name of game in Pakistan. It is artificially pegged against USD since Mar 2014. And this is not unprecedented. The situation was similar during the Shuakat Aziz regime when rupee dollar parity was maintained at Rs60 for a long time

Well, arguably at that time, economic fundamentals were much better than what they are today—FDI was flowing in, exports were picking up and remittances were the new savior against imports. The parity was jolted by unexpected sudden hike oil prices whose impact was not passed onto the consumers. We had to go to the IMF. The fund asked on the onset to adjust currency.

Now, the underline macroeconomic indicators are not shaping well, especially, on the external front. The remittances are no more the savior while exports in terms of GDP are multi-decades low. The imports are probably worse than what SBP numbers are showing. Much of the CPEC related machinery imports are not recorded in the official current account number. Since, most of CPEC related imports are based on Chinese debt; the external debt is not fully reflecting the ground realities. Thus, both the current account and the external debt are understated.

Knowing all the ground realities, and number fudging/ window dressings exercises that are prevalent, the question still remains for how long will the inevitable currency depreciation be delayed? If the PML-N government cannot survive the current domestic political crisis, the currency will slip by 5-10 percent as soon as Nawaz and Dar leave the hot seats. Else, would they be able to sustain the pressure till the government last?

Virtually, every stakeholder BR Research met for interviews/informal discussions since then, on record is saying that currency depreciation has more demerits than merits—60 percent of the economy is worse off by the fall in currency while 40 percent is better off. Yes, they are repeating Dar’s mantra without exception for public consumption. But most of them off the record say that there is some room for depreciation and it’s better to slowly adjust the currency than give a sudden shock which takes years to recover. However, no one dares to confront Dar. What kind of liberal economic management is this?

The foreign reserves which peaked at $24 billion in Oct16 are on downward trajectory since then. The misery is more visible lately—it nosedived by $1.2 billion in the last week to stand at $20.5 billion. With SBP reserves at $15.7 billion, it is covering mere 4.1 months of imports on SBP numbers and 3.5 months of imports on PBS figures.

How long would it take for the rupee to lose its grip against greenback? The plot is set; and a perfect storm is brewing up against PMLN government. The JIT is giving a tough time to the first family. The PM will appear in front of JIT tomorrow followed by CM Punjab in next week.

The situation is not good on external political front. The Qatar crisis is having its toll on Pakistan as reportedly government shelved $2 billion Gwadar-Nawabshah pipeline project which was deemed to be an alternate plan to Iran-Pakistan pipeline. We have too many eggs of power projects in Qatari basket while the remittances flow from KSA is around $6 billion. Apart from this, KSA supports us in many hidden forms; but there is no free lunch as what we got as $1.5 billion gift in 2014 was not unconditional and this country is paying for it today.

Another question is will the country go back to IMF for rescue? The way reserves are falling, by 2018, the government may knock the door of IMF. The first would ask to correct the currency, like it did in Egypt recently, which by REER calculation is overvalued by whopping 27 percent.

The question is will 5-10 percent depreciation be enough to lure IMF? It might not be enough; as we as a country are replenishing collateral against funding. In debt creation, below the line scene is scarier. The government issued sovereign guarantees of Rs368 billion (1.2% of GDP) alone in Jul-Dec2016. The number is higher than combined guarantees of previous two years. The total toll of outstanding guarantees is Rs837 billion out of which Rs821 billion are issued/rolled over within PMLN current regime.

Let’s portray a gloomy scenario. In 2018, the economic establishment will go to the IMF for rescue and the fund would say you have nothing much left to pledge. Correct the currency and come back. Pakistan might end up pleading the likes of US and China – and compromise on strategic grounds. That is one extreme scenario and let us all hope such a day would not come. That said, the country is skating on thin ice, better watch your steps!