- UN Report warns artificial rate policy unsustainable
Among the economy’s bugbears, and there are many ‘usual suspects’ among them, the actual ground strength of the rupee precipitates a raging debate over allowing it to float freely making market forces sole arbiter of its actual value, or keeping it pegged down by State Bank intervention. Now, the country’s forex reserves situation has reached a crunch stage where, considering the myriad formidable factors ailing the economy, this crucial matter needs to be resolved.
That stern financial headmaster, the IMF, to whom we are an irritating borrower, has on various occasions advised, admonished, warned and appealed to the absent common sense of our policy makers to swallow the bitter pill of devaluation, which would lead to better economic health, but to no avail. Now the 2017 report of UN’s Economic and Social Commission for Asia and Pacific has cautioned Pakistan that its current policy of artificially deflating the rupee may not be sustainable particularly if interest rate on dollar is hiked, ending the glut of cheap international global liquidity, formerly so easily soaked up by our Sukuk and Eurobond ‘road shows’, the latest on December 5 netting $2.5 billion. This stop-gap measure enabled the debt-burdened economy to offset the outflows of $886.8 million in one week alone, and pushed total liquid forex reserves up to $20,986.4 billion. The State Bank needs to keep a sharp eye on key indicators, such as overall domestic and external debt, tax revenues, exports, imports and trade deficit, and current account deficit, all highly vulnerable areas. Pakistan’s 2017 growth rate is projected at 5.3 percent, inflation at 4.2, and little else to write home about, with the current account deficit a nightmarish $12.1 billion.
The debate boils down to whether devaluation would actually benefit exports and offset the increased cost of imports (of which oil guzzled $10 .60 billion in FY17), and of astronomical debt -servicing surge. A speculative investor market raid on July 5, 2017 which caused inter-bank dollar rate to rise from Rs104.90 to Rs108.25, ‘added Rs230 billion to the national debt within hours’. Devaluation is a double-edged weapon and must be governed solely by well-considered long and short-term national interests.
