EDITORIAL: The rupee’s worrisome depreciation in the open market is a symptom and not a cause of the economic malaise that besets Pakistan today. The 29 June 2023 staff-level agreement (SLA) reached on the Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) averted the looming threat of default, with the condition (amongst others), based on sound economics, that the government would no longer control the interbank rupee-dollar parity but allow a market-based exchange rate determination to continue (agreed under the 2019 Extended Fund Facility programme and implemented by the first batch of economic team leaders of the sixteen month long government but violated by the Ishaq Dar-led economic team).
The SBA led to around 5 billion dollar inflows last month that were critical to make timely payments to the country’s international debtors (on loans from multilaterals/bilaterals/commercial banks as well as debt equity payments), ensure payment for critical imports (including fuel and cooking oil) and to strengthen the foreign exchange reserves that had plummeted to critically low levels (not enough to even meet one month of imports).
Due to previous violations, the SBA condition that the differential between the interbank and the open market rate would be no more than plus/minus 1.25 percent for five consecutive days was imposed and with the rupee breaching this differential in recent days the situation is fast spinning out of control. The caretaker finance minister has reportedly blamed speculators in the open market and directed the relevant authorities to take appropriate mitigating administrative measures.
There is no doubt that speculators today are players in the open forex market, but they are legitimately worried about the country’s increasing external and internal indebtedness as it grapples with severely contractionary fiscal and monetary policies with a significant negative fallout on private sector output that, in turn, is fuelling unemployment levels.
It is relevant to note that these speculators are distinct from the eight banks found to be responsible for disorderly market conditions in August last year. Be that as it may, to browbeat the open currency market players has worked in the past and may do so again but it would be limited to the short term, especially as the differential between the open market rate and the rate on offer by the illegal hundi/hawala system remains significant.
It is high time to realise that the fall of the rupee in the open market is due to the prevailing macroeconomic situation and not only due to the speculators drive to unfairly profit from the state of the economy.
Pakistan’s desired foreign exchange earnings are from exports and remittances and sadly they have been declining for the past several months. Pakistan Bureau of Statistics reported a decline in exports from 31.782 billion dollars July-June 2021-22 to 27.735 billion dollars July-June 2022-23 (a decline of 12.7 percent), a trend that continued in July 2023 compared to June 2023.
And this decline is in spite of the rupee depreciation that as per economic theory should have made our exports more competitive and representative. Remittances as per the State Bank of Pakistan declined from 31,278.8 million dollars in 2022 to 27,027.6 million dollars in 2023 – a decline of 4.25 billion dollars and 13.5 in percentage terms. Thus with the desired forms of foreign exchange earnings on a downward trajectory the reliance on foreign borrowing has increased.
At the same time, there is general outcry against the SBA conditions, particularly with reference to administered prices – electricity and petroleum products in particular. The caretakers’ defence, also echoed by previous administrations, that these are pass-through prices is not resonating with the general public for two reasons: (i) the capacity of public sector employees to absorb the persistently high inflation of over 28 percent for the past few months was strengthened in the budget for the current year with a raise in wages higher than the rate of inflation at the taxpayers’ expense – a strengthening that was not witnessed by the private sector employees who also do not have and also should not have in a free market economy the security of service that the government employees enjoy; and (ii) the taxes on electricity bills include sales tax (at the standard rate of 17 percent) as well as a petroleum levy of 55 rupee per litre on HSD and 50 rupees per litre on petroleum fuel – indirect taxes whose incidence on the poor householder is more than on the rich.
The technocrats within the caretaker setup need to implement some changes before the public will cooperate with them to implement the SBA conditions.
First and foremost, structural changes are required to be initiated in the appallingly run energy sector as well as in the Federal Board of Revenue that relies on easy to collect taxes (with withholding agents doing most of the collections) and to begin to widen the tax net. But the immediate solution is to slash current expenditure and end the elite capture in the budget that the general public is no longer willing to pay for.
Copyright Business Recorder, 2023