The cumulative 9.4 percent depreciation against USD is surely going to help boost exports and slowdown imports growth. The impact on remittances remains unclear. In a nutshell, this would let the current account deficit to marginally thin and help the cause of addressing external woes. The CAD in Feb18 is down to $1.24 billion from $1.67 billion in January - the impact of depreciation on CAD is already visible.
The good news is that the impact on inflation would be lesser than the quantum of depreciation. (For details read "impact of currency depreciation" published on December 14, 2017). The crux of the story was that since major commodities prices (part of CPI basket) are already at premium to international prices, inflationary consequences of depreciation would remain subdued. The proof is in the pudding, the headline inflation has remained low since Dec17; and the trend may continue.
Since the price adversary is low, the dent on economic growth would not be much due to fall of rupee. However, it is pertinent to note that the equation of growth and inflation can turn ugly in case of too much depreciation. And that is not good for exports as the marginal impact of currency fall dilutes with incremental depreciation. However, imports can keep on falling against higher depreciation but at a higher cost of breaking GDP growth momentum, which is not desirable.
Now the more important question is how much depreciation is warranted. For evaluating that there is a need to see the impact of currency fall relative to trading partners. The indictor best covering this aspect is Real Effective Exchange Rate (REER), there are number of ways to compute REER, let's stick to the model computed by the IMF and published by the SBP.
The REER was at 124.1 in Nov17 and it has come down to 115.1 on Jan18. The depreciation against USD, before yesterday's depreciation, was a mere 4.7 percent while the REER is down by 7.8 percent. The reason for higher REER drop is that the USD is weakening against global currencies and depreciation of PKR against Euro, British Pound and Japanese Yen was 9.2 percent, 9.4 percent and 11.4 percent, respectively.
After yesterday's depreciation, assuming rupee dollar parity continues to hover around 115-116 level, the cumulative depreciation against USD becomes 9.4 percent, while against other three currencies, reaches 14.5 percent, 14.7 percent and 15.9 percent, respectively. This will make REER come down to 110 level in a month or two. And if the USD continues to weaken, a likely outcome, against other currencies to continue, by May-June, REER would adjust further down to 105.
That is a decent number and another around of similar adjustment of rupee against USD by June ie to take the currency level Rs 120/USD by June end would bring the REER to its equilibrium value - square 100 mark.
This is one way to see the equation. However, the IMF is more concerned on the external woes; as per IMF latest country report, the net international reserves were minus $724 million in Feb18 versus $7.5 billion in Sep16 when the Fund programme was concluded. The fall of $8.2 billion in 18 months is a cause of concern and the fund would look at it closely and may push authorities to depreciate rupee further.
However, that might not help the cause, as Egypt is a classic example where 96 percent depreciation in a day in Nov16 brought more woes to the economy than good. (For details read "learning from Egypt" published on February 7, 2018).
The point is that IMF may push for higher depreciation than what is warranted before we enter into fund programme; and the need is to negotiate the case of less depreciation strongly. The need is to keep the currency at current level (Rs 115-116 per USD) till June and if needed, take it down to Rs 120 per USD and then sit tight to reap depreciation fruits. Any further slide in currency from Rs 120/USD would be counterproductive.