Exchange Rate Conundrum


Vagaries of Consciousness

All players, old and new, have contradictory explanations                          

It is difficult to find a previous example comparable to the dispirited environment that is currently surrounding economic management in the country. Most recently it was at display in the wake of exchange rate depreciation a few days ago. At least four different versions have been put forward in defense or opposition to this event from within the government circles.

The first version came from the State Bank Pakistan who took the position that the adjustment was the outcome of the market forces and the adjusted value is in line with the demand supply position in the market. The SBP further assured, just as on the previous occasion, that the rate would continue to be determined by the market forces. In principle, this is the most desirable policy. However, if it were strictly adhered to, the need for such uneven adjustments would not have felt. Also, the small adjustments are smooth and would not jolt the market as did the three rounds (July, December and March) of nearly 5% each, which were quite high.

A few days later, the advisor to prime minister, Dr. Miftah Ismail claimed that this was a policy decision of the government. He elaborated at length that this was a decision taken by the Government and all economic managers participated in deliberations before deciding. The prime minister was also on board. This is an amazing disclosure. Under Section-9A(1)(b) of the SBP Act, 1956, the subject of foreign exchange management, and consequently the exchange rate affairs, is the responsibility of the board of directors of SBP. Even when some informal consultations are carried out, the legal position is not compromised. Indeed, the claim of the advisor is tantamount to arrogating for the ministry what belongs to SBP. More importantly, it makes a mockery of the announcement of the SBP, which defended the decision on the basis of market conditions. One wonders, whether the meeting where the decision was taken also decided on the communication strategy for its transmission. Different versions coming from the key players, evidently, shows no such narrative was formed.

The net international reserves (gross reserves minus liabilities due to be paid in twelve months) which under his watch had improved to $9 billion on End September 2016, have dramatically declined to -759 million. The situation is simply untenable and has to be arrested

The third version is from the former prime minister who is of the view that this is part of the disruption resulted because of the removal of his government. The change in Government could be a reason for affecting economic conditions. However, it needs to be emphasized that the successor Government is also formed by PML-N and the economic managers, as stated above, have taken the responsibility of the adjustment.

The last version was given by Senator Ishaq Dar, in a TV interview. He was outraged on the decision and while condemning in the strongest words, he termed it as a fiasco. He further said that this was the result of poor judgment, inaptitude and lack of realization of the dangers to which the economy has been exposed. He warned that far from promoting exports the depreciation would unleash major inflationary pressures by increasing the cost of production throughout the economy. He also asserted that the real strength of an economy was a stable exchange rate and its demise would herald economic instability and disruption.

Those who know senator Dar’s views on exchange rate may not be surprised at this discourse. He was wary of economic factors behind exchange rate movements. But his successors seem not to share his views and are more prepared to allow adjustment based on market considerations.

It would be curious to surmise what his response would have been if he were to face the current situation. Would he have done anything different? On both occasions of major adjustments, after his departure, it was not the curb market pressure that was driving the need for adjustment, where typically he would have invited money changers and exchange companies and warned them against speculative activity. Such interventions were effective at a time when the position of forex reserves didn’t warrant any adjustment in the rate and only the curb market was not behaving. This situation is entirely different, as reserves are in a free fall. Today, we are losing reserves at the rate of $1 billion per month. Where does one get foreign exchange in such large quantities to continue to throw in the Inter-bank foreign exchange market to keep the exchange rate stable. Even the commercial borrowings are not available to meet such large demand. In the absence of requisite foreign resources, reserves would finish and a situation of default would stare us on the face. Historically, we are long past the danger level before we would rush to seek IMF support.

Senator Dar would not have been pleased to note that during the period since End-September, 2016 Pakistan has added more than $10 billion dollars to its stock of outstanding external debt and has lost nearly $7 billion in reserves. Even the commercial banks reserves have been borrowed in forward contracts. The net international reserves (gross reserves minus liabilities due to be paid in twelve months) which under his watch had improved to $9 billion on End September 2016, have dramatically declined to -759 million. The situation is simply untenable and has to be arrested.

How could anyone ward-off this intractable situation? Exchange rate movement is definitely not a panacea but it is also not a variable more sacred than other economic variables. But its adjustment is part of the solution. However, the present state of exchange rate is a symptom of deeper challenges that have rapidly worsened in a period of about 15-18 months. The entire discipline and gains achieved after the successful implementation of the IMF program have been washed away: both fiscal deficit and circular debt are in a worse state than in 2013; government debt market has broken down as long-term debt has not been sold in eight months, all debts are for three months, making debt management risky and tricky; SBP financing of budget deficit is unrestrained; reforms agenda has been stalled in the areas of privatization, energy and ease-of-doing-business.


There is one positive thing in the economy that is significantly different than in 2013. This is the state of larger economy, which is extremely buoyant: growth, inflation, investments and consumer demands are exceptionally strong. As soon as the policy failures are corrected, the economy would restore its fullest health.





  1. Last para is contradictory and debatable. May be Musharraf and Shaukat Aziz are needed to make things work again.

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