Romping rupee

The frolics of the Rupee could make for a good plot for a Bond movie; the evil Spectre orchestrating the fall of the currency of a let's just say highly capable nation with an intent to destabilise, pursuant to a nefarious plan to profit from the consequent global chaos. Serendipitously, if the related franchise holders do eventually make a movie on such a storyline, technically I can now ask for royalty! In real life however, the Rupee falling was apparently not a big enough deal to replace the JIT hallla-gulla from the top slot in the media limelight, even fleetingly; beyond tickers and a side mention here and there. Probably because, the how and why of the fall and rise of the rupee is incomprehensible for most all Pakistanis, including the media; and to venture a guess most of us did not lose sleep over the Rupee going down; in fact a majority have probably even forgotten it happened. Unfortunately, while I might generally subscribe to "ignorance is bliss" dictum; sometimes being ignorant can come back and bite you severely in the nether regions.
So what exactly are the perils of a dearer or weaker rupee? Well first of all it increases the total amount of external debt in rupee terms; according to the State Bank of Pakistan (SBP), Pakistan's external debt and liabilities currently stand at US $75.7 billion meaning that an Rs 1 fall in the value of the Rupee adds Rs 76 billion to the country's total debt and liabilities, simultaneously and immediately. Obviously this also boosts the cost of servicing the external debt such that it could potentially un-budget the budget; and then there is always the issue of bad optics during election year. On an individual level, it makes all imports expensive, including petrol, travel, telephones, tea and the list goes on, all of which could more than significantly adversely impact disposable incomes of the middle and lower classes.
So what happened? On Wednesday, 5th July 2017 the rupee suddenly depreciated from Rs 104.9/USD to Rs 108.2/USD in a span of a few hours; a record sharpest drop of 3.1% in a single day since 2008. According to Bloomberg, "The rupee tumbled 3.1 percent to 108.095 per dollar at close of trading Wednesday, the lowest level since December 2013. Analysts, including Karachi-based Topline Securities Ltd, BMA Capital Management Ltd and BMI Research, said the nation had devalued its currency". Apparently, the market's first reaction was that this was deliberate, an engineered devaluation; this was on the back off a view, not sure if it was a formal statement, held by SBP, "...this depreciation in the exchange rate will address the emerging imbalance in the external account and strengthen the growth prospects of the country".
Does this mean that the rupee exchange rate vis-à-vis the dollar is not market determined? According to Bloomberg in May 2017, apparently not; "The Pakistani central bank's support for the rupee has left the currency little changed in the past two years. As the economy faces signs of stress ahead of elections in 2018 the question becomes how much longer can it last? Bottom of Form Banks refrain from trading above 104.87 rupees a dollar, according to people with knowledge of the matter. The central bank will assist and ensure availability of foreign exchange to keep the currency steady, the people said, asking not to be identified so they won't be reprimanded by the central bank". And the IMF knows all about SBP supporting the Rupee exchange rate, since they themselves have previously said that the Rupee is about 20% overvalued. It can only be overvalued if the rate is not market determined, and if IMF knew that, it raises eyebrows about their program and numerous reviews. Nonetheless to put things in perspective, a 20% fall approximates to Rs 20, 6 times more than the fall on Wednesday of Rs 3.30 in just a few hours. If you have not done the math, that adds more than Rs 1.4 trillion to Pakistan's total debt and liabilities.
Apparently, our Commerce Minister also knows that the rupee is being maintained artificially by the central bank, since in an interview to Bloomberg last month he revealed that he had tried to persuade the Finance Minister to adjust the rupee after the weakening of currencies by China, Turkey and Thailand. A weaker currency is good for exports as per theory at least, especially if your competitors have resorted to such a strategy; and to say our exports are doing terribly might even be classified as an understatement.
But how does SBP ensure availability of foreign exchange to keep the currency steady? The way all Central Banks do, sell the dollars held by them which obviously results in their foreign exchange reserves going down; as has been happening with Pakistan too. A pretty much, sink if you do and sink if you don't, situation.
So was it an engineered devaluation? That remains unclear now. The government reacted immediately, denying that it was a devaluation, calling it an artificial adjustment, and through what can only be direct intervention in the market, reengineered the recovery of the Rupee to Rs 105.5/USD the very next day; all executed rather efficiently I might add. The official view being that it happened because of a communication gap in the central bank, and between the bank and other institutions. The nation today has a new Governor SBP. All this will keep fertile minds busy hatching conspiracy, for a time after the JIT, which day may or may not come; except that there is a much bigger worry then "who done it" and why; and why is it crucial that the rupee remains stable in election year. If the rupee can fall more than Rs 3 in a few hours, engineered or artificially adjusted, where would it go too in a free fall, and can the nation continue paying the cost of maintaining the Rupee stable? And more importantly how long can we do it?
(The writer is a chartered accountant based in Islamabad. Email: [email protected])