EDITORIAL: The Federal Finance Minister Ishaq Dar has reportedly asked banks and exchange companies to maintain fair business practices and help government strengthen rupee against the US dollar (the rupee, however, ended its three-session losing streak yesterday). The question is whether exhortation or arm-twisting will be effective in bringing down the rupee-dollar parity.
Two observations are in order. First, the rupee-dollar parity that had peaked to a little over 240 on 22 September 2022 declined to 217 on 10 October and has since begun to rise again and was a little over 221 rupees to the dollar this week past.
The new finance minister took oath on 28 September and rightly pointed out that the rupee began to strengthen after his arrival in Pakistan; however, two factors need to be highlighted in this context: (i) those mainly held responsible for the massive rise in the rupee-dollar parity were 8 banks who had been making windfall profits, as per an inquiry report carried out on the instructions of the Prime Minister.
These banks had not been harshly dealt with by the then economic team leaders notably Dr Miftah Ismail as the Finance Minister and the Acting Governor State Bank of Pakistan not by Dar who, as per Ismail, was giving him specific instructions on what policies or measures to implement; and (ii) the incumbent finance minister’s repeated claim that the real effective exchange rate (REER) is under 200 rupees to the dollar, based on calculations which he has not shared with the public that may well account for the State Bank of Pakistan updating the REER to 90.93 in September (provisional) from the revised estimate of 94.37 in August (with average parity at 220 rupees to the dollar) appears to be unrealistic at best and data manipulation at worst.
It is important to note that the Fund in the seventh/eighth reviews expressly stated that “notwithstanding the recent depreciation, going forward the authorities should continue to allow for exchange rate stability and avoid suppressing any trend movement.
Allowing greater role for exchange rate flexibility to address external pressures will thus help safeguard and improve reserve buffers towards more prudent levels in line with the programme targets.” One would assume that the finance minister is aware that the ninth review talks scheduled to begin this month are not held hostage to his insistence that the rupee is grossly undervalued.
Second, the seventh/eighth review also notes that at present there is “an exchange restriction resulting from the limitation on advance payments for imports against letters of credit and advance payments up to a certain amount per invoice (without L/Cs) of the import of eligible items. The authorities noted concern about disorderly conditions for the foreign exchange market should restrictions be removed while complementary macroeconomic policies have not yet fully kicked in. Staff emphasised that more prominence should be given to exchange rate flexibility as a means to address the balance of payment (BoP) pressures rather than to administrative and exchange measures.”
In other words, finance minister’s continued attempts to bring the exchange rate down must not entail administrative and exchange measures and in the event that they are they would compromise the success of the ninth review which, in turn, would arrest all rollovers from friendly countries as well as additional assistance pledged to the Fund directly.
To conclude, an effort to strengthen the rupee must not be from punitive measures that would exacerbate the problems associated with the balance of payment position and stop all aid inflows - be it from multilaterals to friendly countries.
Dar must understand that the sustained failure of successive Pakistani governments, including his previous two tenures as the finance minister, have brought the economy to such a pass that deferment of key structural reforms is no longer an option.
It is critical to undertake politically challenging structural reforms starting with the two most poorly governed sectors; notably, the power and tax sectors as well as slashing current expenditure to create fiscal space, reforms that disturbingly have been agreed time and again with the Fund but never implemented.
Copyright Business Recorder, 2022
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