Trying to do

If rumours could be sold, Pakistan would have been the richest nation on this planet; hands down, without any scientific analysis, I remain confident that no nationality is as good as us when it comes to starting rumours and thereafter promoting them. The Americans may be good at fake news, we excel in rumours. Unfortunately, however, rumours can’t be sold, and worse they distract from what to do even when you are trying to do.

A friend recently remarked that while the popular perception is that the man in the driving seat today is diligently carrying out his duties – according to unreliable sources, a minister unwilling to come out in the open, gleefully asserted that this is the first time in his career that he feels he is a minister – absolutely nothing is moving; there seems to be no government in place. I personally believe that is not the case. However, amidst all this confusion, there are multiple rumours about what the establishment is planning starting from Panama to a technocrat’s government anywhere from now to March 2018, the minus 6 formula with 2 only to confuse, the reshuffling of ministers, and obviously let’s not forget the juicy scandals and family feuds. On the economic rumours front, all that the government seems to have is a fresh amnesty scheme, exporting any available commodity, selling more assets to the Chinese or borrowing more money; rather unimaginative won’t you agree?

Ignoring rumours, the government does bravely assert that devaluation is not on the cards. Except that the story that this volatility in the price of rupee does not reflect market fundamentals and is primarily caused by speculative trading is old hat; these excuses can actually be copy pasted from as near as 2008, and I confess that I have done exactly that. But even if that was true, why do we love speculators trading in the stock exchange but hate them when they rough up our currency- speculators are part of free markets, you may be able to manage them for a while, but they bide their time, and when the opportunity presents itself, they are ruthless. Pakistan has what is called the managed float regime; the exchange rates fluctuate based on demand and supply in the market, but State Bank of Pakistan (SBP), intervenes to influence the rate by buying and selling currencies. So any time the rupee comes under pressure, the traders have a field day and SBP gets palpitations!

A trade deficit is the Summa Cum Laude of pressure on domestic currency. A trade deficit suggests that importers need more dollars than exporters could earn for the nation or workers remitted back home, hence demand for dollars rises, resulting in devaluation. The dollar shortage in the market can be delayed by borrowing or by SBP using its reserves to meet the shortage; except there is a limit to how much a country can continue to borrow and at what price, and SBP’s reserves are already rapidly declining.

But why exactly is the Government against devaluation, especially when the exporters insists that exports declined because of the governments stubborn stance not to let the rupee devalue when all regional countries devalued their currencies thereby making Pakistani goods uncompetitive in the international markets. That may all be hogwash, but there is a case for devaluation purely on pragmatic reasons for a while now; most importantly, a managed slide might be more manageable than a sudden crash.

Well, for one, devaluation suddenly increases the absolute amount of national external debt in rupee terms, thereby impacting adversely the debt-to-GDP ratio; which ratio, at least in my opinion, is utter nonsense. GDP is at best a guesstimate, if not a complete fantasy, so why would it matter if debt is 62% or 72% of GDP? The fact that after paying for our debt servicing, the federal revenue receipts are not sufficient to meet even 30% of the military budget, evidences that perhaps we might have already over borrowed.

A more real impact of devaluation is that it will increase the debt servicing costs, thereby impacting the fiscal deficit; in fact federal revenue receipts might end up being used for debt servicing in entirety if the rupee is devalued by more than 10%; hence the rupee had to be defended.

Finally, devaluation of the rupee also directly impacts inflation for the common man since it increases the cost of all imports; specifically fuel and energy, which consequently results in everything produced and manufactured in the country getting more expensive. Imported tea and edible oil get more expensive, and well the list goes on. While generally the plight of the common man has never troubled any government in Pakistan, this is the election year.

Hence the government will keep trying to do or die, defending “The Wall”- the Game of Thrones fans will have immediately understood, those who haven’t watched GOT, replace “The Wall” by “Rupee”- except, everything has a cost, and the cost of defending the rupee for the next few months might be very, very calamitous.

At this point, I confess this was not the theme of today’s article; the objective was to scan the monetary and fiscal policy horizon and identify available options for the Government to manage the current economic headaches. But no point in scraping the train of thoughts, so we conclude with a promise to continue with “Trying to Do” next week and thereafter, until its logical ending.