The rise and rise of the dollar vis-a-vis rupee has turned it into a drone of the lethal kind. From Rs99.58 at the start of the current fiscal year, a dollar’s worth had risen to Rs109.6 at the time of writing this piece. As it rises, imports become expensive, repayment of foreign loans and interest payments require more rupees, at a time when the economy is on the downhill. Oil and food comprise 46 per cent of our imports. These are essentials that cannot be reduced, not in the short run, at least. In the first quarter, foreign debt increased by 390 million dollars. A hefty sum of 1,403 million dollars was repaid as principal, 188 million in interest and 157 million repaid in short-term debt. Total debt stock increased by Rs1,129 billion. Monetary expansion has been caused mainly by the government borrowing from the banking sector. As a result, the return of double-digit inflation is unstoppable. The latest Sensitive Price Indicator, for the week ending November 21, tells as much; it stood at an annualised rate of 15.5 per cent. Food prices are leading the charge. A closer reading of the agreement with the IMF reveals that controlling inflation is not its objective in the first year. It aims at building up reserves and letting the exchange rate find its true value.
In theory, depreciation of the rupee means that exports become cheaper and hence, attract more foreign buyers leading to larger earnings of dollars to support reserve accumulation. Textiles, with a declining share in world trade, provide 56 per cent of our exports. Some textile items have done well but import rigidity left a trade deficit of 4.43 billion dollars in the first quarter, up from 3.66 billion dollars in the comparable period last year. Expensive imports rose faster than the cheaper exports. Remittances from overseas Pakistanis of 5,276 million dollars in July-October, an increase of 6.3 per cent, helped. But this was not enough to contain the deterioration in the external accounts. Foreign direct investment is very low. All told, there is a net outflow in the financial account. The very recipe imposed by the IMF to build reserves by buying dollars from the market pushes the value of the rupee down.
The State Bank of Pakistan (SBP) has increased its policy rate and yet, the stock market is rising. This is giving a false sense of confidence to the finance minister and his team. They do not see the hot money movements behind it. Even the SBP, which was selling dollars before the agreement with the IMF, reads a speculative sentiment in the exchange rate volatility. However, the problem is that by leaving things to the exchange rate, the SBP and the government have lost control over the economic levers. They have now no option but to demonstrate that they can accumulate reserves at a level that will beat the market to gain its confidence. On November 13, these reserves were only 3,645.8 million dollars. Going to the IMF was sold as the only source of urgent reserve accumulation. By front-loading its conditionality, the IMF has actually contributed to the lack of confidence in the rupee. One window is still open: a policy of selective import compression and intelligently devised capital controls to achieve what non-tariff barriers achieve, say, for India can conserve foreign exchange. It need not be overstressed that the policy so conceived departs from the accepted text. Failure to do so will, however, aggravate the havoc resulting from an agreement negotiated by economic simpletons.