EDITORIAL: The Pakistani rupee has appreciated significantly in the open market subsequent to the launch of a crackdown on 5 September 2023 – from a high of 320 rupee bid, 323 rupee offer on 5 September 2023 against 297 rupee bid, 300 rupee offer on 12 September 2023 or in percentage terms a rupee appreciation of around 7.1 percent.
However, the interbank rate has not fluctuated as much – from 306.95 bid, 307.15 rupee offer on 6 September 2023 to 298.9 bid and 299.10 on offer on 12 September or a decline of around 2.5 percentage points.
The differential between the appreciation of the rupee in the open market versus in the interbank market may have been to narrow the gap to plus/minus 1.25 percent as agreed with the International Monetary Fund (IMF) under the nine-month 3 billion dollar Stand-By Arrangement (SBA) approved by the Board of Directors on 12 July 2023 – an arrangement critical to averting the looming threat of default as friendly countries, particularly Saudi Arabia, the United Arab Emirates and China, had made any rollovers and/or additional pledged support contingent on an agreement with the Fund.
Be that as it may, the government officials are legitimately claiming that the target of the crackdown are elements involved in illegal activity including smuggling (particularly to Afghanistan), hoarding of dollars and against organised criminal cartels.
That there was a need for this crackdown is not in question; however, what is required is to only target the unscrupulous and not be tempted to attempt to deal with imported inflation by appreciating the rupee to beyond what is dictated by market conditions.
There is dangerous talk in official circles that the open market rate, sans any illegal activity, is as low as 250 to 260 rupees to the dollar.
This raises the spectre of a return to the flawed policy in evidence during Ishaq Dar’s disastrous handling of the economy - from 27 September 2022 when he took oath as the finance minister till the dissolution of the government in the second week of August this year - which accounted for the refusal of the Fund to reach a staff-level agreement with Dar, thereby necessitating the then Prime Minister, Shehbaz Sharif, to intervene and ensure the signing of the SBA.
One would hope that the stakeholders are fully cognizant of the fact that the Fund has not been willing to grant any waivers or phase out the existing harsh upfront conditions since the end of the Covid-19-related concessions/deferrals in 2021 and that any cessation of Fund support will automatically lead to (i) a freezing of borrowed funds from friendly countries (estimated at over 5 billion dollar inflows after the staff-level agreement was reached on the SBA on 29 June 2023, included in the 7.779 billion dollar foreign exchange reserves as of 1 September 2023); and (ii) jeopardising the inflow of any foreign investment.
The Special Investment Facilitation Council, represented by civilian (federal and provincial) and military personnel, envisages foreign investment inflows as the way out of the current economic impasse with an overambitious target of over 25 billion dollar investment inflows within the short term with expectations as high as 100 billion dollars in the medium to long-term. It stands to reason that any derailment of the Fund programme will automatically lower Pakistan’s rating with a consequent negative impact on foreign investment expectations or prospects.
There is talk of tightening the foreign exchange market by allowing banks to deal in this market. However, it is worth recalling that last fiscal year it was eight banks that were found guilty of speculating in the foreign exchange market that led to disorderly market conditions.
This was acknowledged by the State Bank Governor to a standing parliamentary committee late last year, and additionally he noted earlier this year that under consideration were two proposals: to impose a penalty directly or through fiscal measures. The latter was the preferred option; however, the tax is on all banks and not just those that were found guilty by the regulator
Any attempt to deliberately appreciate the rupee would therefore not be supported by the Fund on economic grounds as it would fuel imports that, in turn, would create another balance of payment crisis, and would almost certainly create a lacuna in the way of the success of the pending staff-level review with obvious ramifications on borrowing from friendly countries as well as the equity market with the threat of default resurfacing.
Copyright Business Recorder, 2023