Another PKR slide

The rupee depreciated by 3.5 percent against the dollar Monday before improving slightly. The State Bank of Pakistan (SBP) described this depreciation as "market-based adjustment" which implies that the central bank refrained from engaging in market intervention. This makes it the third time since December 2017 that the rupee has depreciated - 5 percent on 12 December 2017 in the wake of what was arguably a recommendation by the International Monetary Fund mission during its First Post-Programme Monitoring Discussions and on 20 March 2018 by 4.5 percent. Given that the responsibility for 'managing' the exchange rate falls squarely on the central bank with its overarching objective to maintain a sustainable current account deficit and prevent inflation, SBP's explanation for the depreciation all the three times was similar: "exchange rate movements will continue to reflect the demand-supply conditions in the foreign exchange market. And it will continue to closely monitor the foreign exchange markets; and stands ready to intervene to curb the emergence of speculative pressures." This implies that there is a threshold beyond which the SBP would perhaps intervene. The Caretaker Finance Minister has wisely refrained from making any statements on the matter, unlike Miftah Ismail, the Finance Minister in the Abbasi-led administration, who went on record in March stating that the rupee would stabilise at around 115 rupee to the dollar - a rate that would be sustained till December 2018.
The question is whether the cumulative depreciation of 13 percent is enough to achieve the objectives that are patently evident: to check the growing trade deficit as well as to shore up the fast depleting foreign exchange reserves. Pakistan's trade deficit during the first eleven months of the current fiscal year widened to 33.9 billion dollars with an import surge that continued unabated on the back of China Pakistan Economic Corridor while export growth due to the export incentive package was insufficient to arrest the rise in trade deficit. In May alone, imports were 5.8 billion dollars while total imports were estimated at 55.2 billion dollars during the first eleven months of the year according to the Pakistan Bureau of Statistics. Thus it is extremely unlikely that the cumulative depreciation would be sufficient to bring about stability in the economy and the caretakers would need to take emergency measures to check all unnecessary imports, with the term unnecessary getting ever more restrictive, including though not limited to 100 percent margins on certain products while not violating the World Trade Organization's rules, and making bank statement of the person gifting the vehicle a requirement for import of used cars.
Prior to the second depreciation in March, Pakistan's foreign exchange reserves were 11.944 billion dollars which declined further to 10.041 billion dollars by 1 June 2018 according to the SBP website - an amount that is not sufficient to meet the three-month import minimum requirement. Or in other words, the depreciations in December and March were simply not enough to check, leave alone reverse, the trade deficit or to strengthen the foreign exchange reserves.
Interestingly, Paul McNamara, London-based fund manager at GAM UK Lts that holds Pakistan bonds, stated rather dismissively though accurately after the second depreciation that "It is the usual routine for Pakistan - hold the line on currency until the trade balance deteriorates, devalue, repeat." 'Hold the line' has been a favoured policy decision of our finance ministers in the past given that depreciation implies a rise in the country's external indebtedness that constrains the development allocations made in the budget. However, with the massive rise in the country's external indebtedness during the Ishaq Dar/Miftah Ismail tenure as finance ministers - from around 62 billion dollars in 2013 to over 92 billion dollars today - the actual impact would be that much more.
This newspaper had warned the PML-N's two finance ministers that their policy of heavy dependence on external borrowing, and when multilateral and bilateral assistance dried up after the end of the IMF programme to borrow from the external commercial banking sector at high rates with short amortization period, coupled with a sustained overvalued rupee policy would seriously compromise economic stability as it certainly has done.