The rupee-dollar parity during two tenures of Ishaq Dar as finance minister (2013-17 and 27 September 2022 to date) has invariably been a subject of general distress, including all the stakeholders – domestic as well as international.
Dar was appointed finance minister for the first time on 7 November 1998 by the then Prime Minister Nawaz Sharif and he retained the portfolio till Musharraf’s coup détat on 12 October 1999. The day of his appointment coincided with the partial lifting of sanctions imposed in the aftermath of the nuclear tests by the US on India (11 to 13 May 1998) and Pakistan (28 May 1998) which paved the way for international financial institutions to reengage with Pakistan.
Two factors pre-dating Dar’s appointment are significant. First, freezing of dollar accounts in commercial banks in the aftermath of the nuclear tests had little impact on the rupee-dollar parity as the country was on a managed float system at the time.
The exchange rate hovered between 44.1 to 44.59 till June 1998 however, as expected, reserves continued to fall reaching an abysmally low 400 million dollars by November of that year which, in turn, raised the ugly prospect of the possibility of not making debt repayments, the first time in the country’s history.
Second, the managed float system (1992-97) was abandoned on 22 July 1998 in favour of a multiple exchange rate system which included: (i) an official rate, (ii) a floating interbank rate based on exports proceeds/remittances/invisible flows, and (iii) a composite rate by combining the official and floating interbank rate.
Ishaq Dar’s next stint as the finance minister (31 March 2008 to 13 May 2008) was too short to make any impact on the currency market; however, his public criticism of Shaukat Aziz for reportedly manipulating official macroeconomic data generated considerable angst amongst Pakistan’s major partners during his official visit to the US to attend the International Monetary Fund/World Bank annual meeting.
Between 7 June 2013 and 22 November 2017 Dar was the undisputed Finance Minister with many referring to him as the de facto deputy prime minister. And during this period began a series of blatant interference in the exchange market with the rupee clearly overvalued and the linkage between exports/remittances/invisible inflows/outflows all but abandoned. Three observations on policy decisions taken during the period are relevant and would one would hope mitigate against a repeat of such policies.
First, during this period around 20 billion dollars was used to prop up the rupee value – a decision that was no doubt taken to understate the budgeted debt servicing and payment of principal as and when due.
The real effective exchange rate as calculated by the State Bank of Pakistan by June 2017 was 121 indicating that it was overvalued. Local economists raised the issue of gross overvaluation of the rupee that was negatively impacting on other key macroeconomic indicators including exports and this finally compelled the IMF staff to indicate in a mandatory quarterly review (Pakistan was on a Fund programme at the time) in a footnote that the Pakistan currency was overvalued from between 5 to 20 percent – a wide range that does little justice to the expertise professed by the Fund staff.
Second by late 2013 early 2014 the rupee began a free fall losing around 4.5 percent in the open market and 2.4 percent in the interbank market with a spread of around 4 to 5 rupees. Reserves declined to around 10 billion dollars, about two months of imports, with the State Bank placing administrative controls on dollar demand while Dar and the then State Bank Governor, in a meeting with the foreign exchange dealers, were told to ban gold imports which had increased by over 500 percent due to plummeting gold prices.
It is also noteworthy that at the time the IMF was expressing concerns that the monetary policy was not tight enough given that the discount rate was kept low as per the PML-N manifesto pledge based on an economically unsound contention notably that a low rate would raise output and employment. The Saudi government gave a generous grant of 1.5 billion dollars mid-March 2014 that contributed to strengthen the rupee.
And finally, Dar subscribed to the flawed economic policy that as the interest rate abroad is lower (at the time around 5 to 6 percent) than that available in the country (around 12 percent) therefore it is preferable to borrow from abroad. While this logic convinced the then Prime Minister Nawaz Sharif yet independent economists advised against it at the time by pointing out that borrowing domestically would not push the country towards default, as internal arrangements were always possible.
Dar ignored all such advice and proceeded to increase external borrowing from 48.1 billion dollars in June 2013 to 62.5 billion dollars in 2017 – a rise of nearly 30 percent. He raised reliance on global bonds/sukuk at well above the then prevailing market rates from 1.5 billion dollars in 2013 to 4.8 billion dollars in 2017 – a rise of 219 percent. This of course did not preempt the need for incurring domestic debt which rose from 9.5 trillion rupees in June 2013 to 14.8 trillion rupees in 2017.
Dar’s return as the country’s finance minister on 27 September this year has led to a widening of the spread between the interbank and the open market rate of more than 25 rupees with reports indicating that dollars are unavailable even at 250 rupees.
All very stringent administrative and exchange measures are in place but have been inadequate to arrest the fast depleting reserve position, 6.7 billion dollars as on 2 December 2022, accounting for a 10 percent decline in remittance inflows year on year July to November which is putting further pressure on our fragile economy.
Access to external borrowing, budgeted at around 40 billion dollars with only around 5 billion dollars having been disbursed in the first nearly six months is pledged but its disbursement is dependent on the success of the IMF’s ninth review. That success as per the Resident Representative of the IMF will depend on ensuring exchange rate flexibility – diplomatic speak for lifting the controls that are playing havoc with inflows from remittances for one.
To conclude, the PML-N as well as the other coalition partners need to take cognizance of these flawed policy decisions that are placing unbearable pressure on the country’s extremely fragile economy.
Copyright Business Recorder, 2022
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