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The rupee rollercoaster

I first heard about it in the summer 2010, from Dr Ehtesham Ahmed, who had served as adviser to the executive director for Pakistan on the board of the IMF, and was in Pakistan in those days to advise the government on the VAT legislation.

Dr Ahmed went on air with me, and if I am to paraphrase from memory, this is what he said: ‘The IMF programme is dead. Pakistan has failed to implement the central expectation contained within it. The thing to worry about now, is not how to get the programme back on track. I emphasise, it is dead. The thing to worry about is how to meet the repayment obligations that are going to begin in a big way sometime next year, and accelerate thereafter.’

Now this was in 2010. And I feel free to reproduce it here because it was said live on air, as part of our main 9 pm bulletin, in which my director news at the time had slotted a full half hour just for this interview, after listening to Dr Ahmed in his office for 10 minutes.

I’m often reminded of that 30-minute interaction with Dr Ahmed that I had in the summer of 2010, because in hindsight it’s clear to me that he was the only one who was sounding the alarm on the gaping vulnerabilities on the reserve front that were coming our way.

I write this today not to edify Dr Ahmed, I’m sure he has his fair share of regrets like any other human being. I write it simply to underline that the serious difficulties faced by Pakistan today on the external front were known back in 2010, and a record exists of these concerns being aired in a prime time news broadcast of a major television channel.

At the time, Pakistan’s total foreign exchange reserves stood just over $15 billion. Some people dismissed talk of difficulties in making repayments by doing simple back-of-the-envelope arithmetic.

“What do we owe the IMF— $7bn or $8bn? And what are our reserves? $15bn or $16bn dollars? Do the math, Khurram, does it sound to you like we are in trouble?” said one economist at the time who serves in a senior government position.

The layperson can be forgiven for missing the point behind the simple arithmetic. If we set up the problem like one of those multiple choice questions from a Scholastic Aptitude Test we used to sit in the bloom of youth — when life was so full of optimistic possibilities — then of course it would appear that there is no problem.

After all, if Jack has 15 oranges in his hands, and he gives eight of these oranges to Jill, doesn’t he still have seven oranges left? How many oranges does Jack need, aren’t seven enough?

But the point is precisely that seven oranges get us nowhere in this day and age. The crisis of 2008, which moved fast across the financial sector — threatening a freezing of all bank accounts if emergency aid had not arrived in time — was sparked precisely when reserves fell below the $7bn level.

It wasn’t that there weren’t enough oranges for Jack at the time. The problem was that the continuous downward glide path ate away the central bank’s firepower to defend the rupee, which ignited speculative sentiment as the rupee fell with alarming speed, and people and institutions rushed to buy dollars fearing continuous and large-scale devaluations.

This rapid ‘dollarisation’, as the phenomenon is called, put enormous strain on the financial sector, and as the panic spread, the authorities were forced to shut down the stock market, then shut down withdrawals from mutual funds, and may have been forced to shut down withdrawals from banks and impose curbs on the forex markets had the IMF not stepped in quickly with something like $3.5bn of immediate assistance.

But today, eight oranges and five years later, we are standing at the exact same spot we stood in on the eve of the 2008 crisis. Reserves are now at $8.7bn, according to the State Bank, but that doesn’t include those dollars ‘encumbered’ in a complex array of swaps and forwards, meaning eight oranges aren’t exactly eight oranges but more like seven or so.

The rupee has started registering large declines, and it’s hard to tell where these are going to stop and how. Anxiety on the continuous declines is already being voiced in the mass media, and this is what the State Bank said last Friday:

“[The] challenges on the balance of payments position are unlikely to subside. Further payments of $1.6bn of IMF loan in the remaining five months of FY13 and $3.2bn in FY14 do not help the situation either. While the economy has sufficient reserves to meet its debt obligations, the real challenge is to manage the market-driven sentiments … It is important to remember that only a consistent increase in foreign exchange can ensure stability in the market.”

But still, not everybody gets it. The last one to reassure us that Jack has enough oranges is none other than the newly minted face of Q bloc, Mr Salim Mandviwalla, who in an on-record interview has assured us that there are no problems on the external front, that we have been paying the IMF without difficulty.

It’s time for Jack to put his oranges away. It’s time to wake up to the fact that Pakistan is coming back full circle, to the autumn of 2008, if urgent actions are not taken immediately. It would be a pity for posterity if Jack were to take his famous tumble all over again — and break his crown — after all the warnings that have been sounded.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com Twitter: @khurramhusain

Khurram Husain, "The rupee rollercoaster," Dawn. 2013-02-14.