The rupee collapse

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  • And a clueless SBP

The one thing capital markets hate even more than bad news is uncertainty. So the least the SBP, as custodian of the money market, could have done was provide clarity once the rupee suddenly started dropping against the dollar on Tuesday morning. Instead its vague statement, that the ‘devaluation was triggered by payment pressures building within the market’, only made the pendulum swing more forcefully from greed to fear – the two market extremes. Initially traders read the sudden squeeze as deliberate devaluation; especially since Miftah Ismail favoured it so strongly just four days ago. Pundits, after all, can be forgiven for taking market cues from the finance ministry given their experience of the Dar years.

SBP’s clarification about ‘payment pressures’ meant the depreciation was not deliberate, though it did not quite spell it out, but rather a demand-supply contraction. Yet it could not have been payment pressures, because they are not sudden. Any payments big enough to jolt the market so seriously are usually signed years in advance, and are never a market surprise. The problem, as Miftah Ismail suggested while advocating the devaluation, lies in the real economy; more precisely in that big black hole that the current account deficit has become.

SBP is also wrong when it says it can intervene to provide stability. With forex reserves barely covering two months of imports, any intervention would practically wipe out the reserves overnight. In the immediate term the best the government can do is scramble to float some bonds or reschedule some loans to divert some patch-up funds to the money market. But the real solution is very long term indeed. The rupee has fallen through the floor, finally, because of chronic revenue collection problems in the real economy. And unless the matter of export and tax earnings is resolved, there will be no respite for the capital market either. So far no government has had the vision or the will to carry out the wide and thorough reforms needed to fix the revenue problem.