Currency: ego wins over rationale

The mysterious story of 3 percent single day depreciation of currency unfolded yesterday. Kudos to the SBP acting Governor, Raizuddin. He has probably forgone governorship by taking the right step. The SBP, by law, is independent and should make interest rate and exchange rate adjustments in accordance with macroeconomic needs. However, this time around, it went against the Finance Minister’s will.

The SBP opined that the currency is artificially appreciated and it needed some adjustment, and rightly so. The institution did it, by not intervening the exchange rate market for a few hours, without Dar’s consent. The timing was critical as Dar was too busy handling the political chaos. But he bounced back calling the banks’ presidents in Islamabad and scolded them for acting against “national interest”.

What exactly is national interest? Isn’t the independence of institutions in greater national interest? Isn’t curbing current account deficit through policy measures in national interest? Why the ministry of finance, who is the biggest client of banking system, continues to control the SBP?

Back to rupee depreciation. From Rs104.9/USD to Rs108.2/USD in a day without SBP intervention and coming back to Rs105.5/USD the very next day after Dar came with full force. And now Rs105-106 per USD seems to be new equilibrium. However, there might be causalities in the process. Such as Riazuddin, losing the hope of governorship, someone from the SBP losing his job, some treasurers at banks may have to pay back in one form or the other.

The bottomline is that the currency appreciation is back. Dar would soon have a governor of his choice - Ex Finance Secretary Tariq Bajwa name is making rounds. The norm of ministry led SBP's intervention would be back with full strength for the PML-N to gain political mileage

But in the process, SBP’s current leadership demonstrated the blatant interference of finance ministry in the central bank’s day to day affairs. On the flipside, the law has been passed on institution’s independence and autonomy. There is a crystal clear contradiction between the law and ground realities.

The SBP’s one day long (or short) true independence not only corrected the currency market but has also revised imports, current account, external debt and debt servicing numbers to incorporate offshore foreign currency account transactions related to energy and power sector (mainly under CPEC) from July 14 onwards.

According to revision, imports are up by $805 million and $958 million in FY16 and 11MFY17 respectively. The addition to import services is almost half of goods imports. The overall current account deficit is up by $1.4 billion (FY16) and $1.7 billion in 11MFY17. The CAD is increased to $10.6 billion (3.8% of GDP) in 11MFY17, making the case of currency depreciation even stronger.

Let’s evaluate the performance of PMLN regime on external scorecard with revised numbers.The country’s total external debt and liabilities revised up by $1.9 billion by Mar17 to stand at $77.6 billion. The net incremental debt in 15 quarters of PMLN government stood at $16.7 billion (Jun13 debt: $60.9bn), while foreign exchange reserves are up by $10.5 billion in the same time. Simple math reveals that had the debt remained unchanged, reserves would have fallen by $6.2 billion in PMLN tenure from $11 billion in June13.

There is no rationale for not letting the currency find its real value. Exports are falling and what has the economic establishment done to undo the exports decline? The problem is that Dar is the decision maker and all he wants is low fiscal deficit and high reserves without delving into the cost of doing so. The refunds are not released because that would lower the FBR tax revenues. Currency is not adjusted for their benefit because it would hurt some egos.