Fear of rupee devaluation drives investors into dollar territory
Finance Minister Ishaq Dar, despite his indictment, may be stubbornly resisting resignation, but his policies are already beginning to unravel. Always known as a strong rupee man, fiercely opposed to devaluation, whether feasible or not under the laws of economic reason and ground realities, he constantly struggled to upgrade the country’s foreign currency reserves, even by massive dollar infusions from foreign banks at prohibitive rates for short terms. Indeed, the rupee, with precious little positive economic indicators to back it up, remains artificially propped up, using short-term measures such as State Bank of Pakistan (SBP) flooding the market with greenbacks, dealers being prevented from selling dollars to the public, or IMF bailout packages. The latter has long argued for devaluation to a realistic level. With the person behind the upward- pegged rupee policy possibly being forced to resign soon, with devaluation its fallout, the far-sighted investors’ innate instinct of self-preservation has led them to convert rupee holdings into dollar accounts, and commercial banks have reportedly harvested $1.2 billion in the last four months alone, with their reserves hitting a record figure of $5.9 billion in September. Conversely, rupee deposits have slumped by Rs.329 billion in two months.
The conviction of the local investors in again turning towards dollarisation is quite extraordinary, as foreign currency accounts were notoriously and catastrophically frozen once in May 1998 after Pakistan’s nuclear tests, despite all governmental guarantees and safeguards, shattering confidence in them. But once bitten, twice shy, or as the Chinese proverb goes, ‘A man who is bitten by a serpent is afraid of a rope’, are apparently not the guiding principles for the diehard local dollar investors. Freezing of accounts is an ephemeral remedy, what is needed is stringent check on capital flight and fool proof laws to regulate it, as SBP figures reveal that Rs. 800 billion (!) were remitted abroad through foreign currency accounts during 2011-16. That and maintaining a healthy balance of trade by sharply enhancing exports, encouraging foreign remittances through banking channels, and cracking down hard on the black market, are the only feasible measures.
