And the very rough road ahead
By stubbornly keeping the rupee at an artificially appreciated level only acceptable to him, for a little over four years as Finance Minister, Ishaq Dar essentially sowed the seed for the rapid depreciation we have been witnessing since his departure from the country. His exit did allow the State Bank to autonomously execute its mandated function of managing the exchange rate. Now that the rupee has been left to the mercy of natural market forces it has – at a rather speedy pace due to years of inaction previously – started to find its actual value. The lowest open market rate this week was 119.80 with no signs of stopping meaning it will most likely break the psychological barrier of 120.00 when the market opens tomorrow. Moody’s has forecasted that the interbank rate – currently stable at around 115.60 – could be as low as 125.00 by June next year.
Inflows remain sluggish as a result of falling exports and worker remittances resulting in immense pressure on our foreign exchange reserves that have reached a low of $10.03 Billion (central bank figure) translating into an import cover of just two months. In 2013 the PML-N took over a complete mess with reserves at an abysmal $9.09 billion. As things stand it seems the next government will more or less be taking over the same sort of mess and we all know what comes after: bailout programmes from international donors at exorbitant interest rates and if you’re lucky ‘gifts’ from “friends” that come attached with some very taut strings. The additional debt in the short term does beef up your reserves giving you some breathing room but the long term cost is the increase in external debt that this outgoing government has piled up to $91.8 billion.
With the interim government now in place some crucial policy decisions on the exchange rate, foreign exchange reserves and the external account will have to wait. It would have been better if the past government had paid more attention to this matter before it got this out of hand. Perhaps the next one does not make the same mistakes.
