Home »Editorials » An overvalued rupee

An overvalued rupee has been a consistently favoured policy by the PML (N) government which is cited by independent economists and international donor/rating agencies as the main reason behind our export slide. This policy is, unfortunately, rooted in its finance minister Ishaq Dar's overwhelming focus on the discipline that he qualified for, notably accounting, as opposed to in conformity with basic economic theory which stipulates that the more overvalued the currency the lower the exports due to loss of competitiveness in the international market and the higher the imports which are obviously rendered more attractive. There is no doubt that at the time the PML-N government assumed the reins of government in June 2013, the budget deficit had reached unsustainable levels at 8.2 percent and at the same time foreign exchange reserves had plummeted to less than 3 months of imports. The focus of the newly-appointed Finance Minister at the time was therefore appropriately not only on: (i) accessing a package of 6.64 billion dollars from the International Monetary Fund under the 36-month Extended Fund Facility on 4th September 2013 which required the government to give a time-bound action plan to bring the deficit down to sustainable levels, but also to (ii) strengthen its foreign exchange reserves.

To achieve the latter objective, as per economic theory, governments are advised to encourage exports and discourage imports through fiscal and monetary measures. Sadly, though Dar opted to not only borrow directly from international donor agencies like the World Bank and the Asian Development Bank who extend the bulk of their loans at the market rate with their concessional lending limited by the country's performance (and Pakistan's performance has been deemed to be declining) but also began to borrow from the capital market by issuing Eurobonds and sukuk at rates well above the international rates (8.5 percent for a 10-year and 7.5 percent for a five-year Eurobond and 6.5 percent for sukuk). These debt enhancing measures did prop up foreign reserves, acknowledged by the IMF mission chief, however, they also accounted for an erosion of the real effective exchange rate which, as per a deliberate policy of the government, was not allowed to slide as that would have raised debt servicing and payment of principal as and when due in the annual budget accounts to unsustainable levels.

In this context, it is pertinent to mention the recent views of two agencies that are frequently cited by the finance minister as proof of good governance of the economy during his tenure. The IMF in its recently uploaded Article IV Consultations report advised the government 21 times to adopt greater exchange rate flexibility and to desist from administrative measures (defined as artificially keeping the value of the rupee at the current level). Moody's opinion with respect to the rupee plummeting in value by 3.1 percent on 5th July, which had prompted Dar to hurriedly appoint the next Governor of the State Bank of Pakistan and direct him to inquire as to who was responsible for the erosion of the rupee value, was as follows: "on July 5, 2017 after nearly two years of stability, the Pakistani rupee depreciated by about 3 percent following market intervention by the central bank. The intervention responded to mounting external pressures and deterioration of export competitiveness following persistent real effective exchange rate appreciation." We, based on the past four years of flawed policies, are compelled to conclude that as long as the incumbent remains in control of the Ministry of Finance and as long as he remains obdurate as to the economic soundness of an overvalued currency, the rupee would remain overvalued with a consequent negative impact on the country's external account.







 

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