Too many cooks are spoiling the rupee broth

The State Bank is often heard stating that it is the market that determines the value of rupee. In such a case, the prime minister’s statement becomes questionable – Bloomberg has quoted him as saying that the government has no plans to devalue the rupee further.

What adds to the confusion on the force behind the rupee is the statement by International Monetary Fund Mission Chief to Pakistan Harald Finger, who has said that the fund welcomes State Bank of Pakistan’s move to adjust the rupee. 

The IMF welcomed on Thursday the recent rupee devaluation, describing it as important for favourable economic growth momentum, according to Reuters.

However, in Pakistan’s case, it is the economic deficit that keeps weakening the currency.

Pakistan runs its affairs on borrowed money, it cannot keep its currency strong – the wider the gap, the lesser the value. If you keep your currency tight and grow on borrowed money, you accumulate dollar deficit, until a time where all your borrowing is about settling the debts. Debt grows and so do the interest payment, adding to the debt.

This way, the country’s economy becomes like a bird with broken wings, which can only wish to fly high.

On the other hand, the finance ministry and SBP are on a complete divide on the exchange rate policy. The statement from the finance ministry is a policy that Pakistan has been following since a long time. It is like pressing a wire spring multiple times – it goes back to its original position but loses strength every time it is released.

And the job of managing rupee is done by SBP, which follows a stick and carrot approach here. Such a system cannot be market-based – the number is placed where it is liked to be kept.

All the governments do this to the rupee i.e. devaluation. But now the premier has said it would not be taken down further.

The move will benefit the government the most and the biggest one would be that their tax collection would improve.

If the government has made the move to collect more revenue, then it is likely to achieve the target, said a tax consultant.

Prime Minister Shahid Khaqan Abbasi has said the inflationary impact would be 0.5pc. But according to a source in Karachi Chamber of Commerce and Industry, on imported goods, a 5pc devaluation would have a 15pc price impact.

The question that still remains is a fix to the issue.

The real solution is a long-term strategy that can increase the foreign exchange earnings and calls for reshaping of a market in line with changing technology. For exports, new markets and products are required. A fruit exporter told me once that Pakistan has the potential to export a billion dollar worth of bananas.

If foreign exchange is the blood of our economy’s life then we ought to work on increasing the resources which boost foreign exchange earnings.

There is a need to have a policy that could assuage the shocks caused by economic ills.