Spikes and slides

There was a slightly severe financial event on Wednesday that seemed to have gone unnoticed when it actually happened. The Pakistani rupee tumbled 3.1 percent against the US dollar in a single day as the exchange rate increased to Rs108.00 per dollar from Rs104.90 per dollar. The fall happened without warning and had many tongues wagging on whether the government had finally decided to give into the demand of exporters to devalue the rupee to boost exports. As people tried to understand whether it was a planned move or whether something about the structure of the economy led to the sudden fall, Finance Minister Ishaq Dar added to the confusion by claiming ‘indignation’ at this ‘artificial event’ – with the rupee falling to its lowest rate since 2013. The SBP’s word on the matter contradicted the finance minister; the central bank in effect supported the fall in value, saying that the deficit in Pakistan’s external account has been increasing and that depreciating the currency would improve Pakistan’s growth prospects. The merits or demerits of such a decision would usually be the topic of discussion after such a move, but it was not clear whether this happened with the government’s approval.

It is not odd for central banks and elected governments to be polar opposites on the issue of currency depreciation. Many economists had been saying that Pakistan’s currency has been inflated by anything between five and 20 percent. The IMF veers on the side of the higher number. We do not know what the government wants done on the matter. Taken together with the sudden fall in the stock market, the government seems to have little control over two key indicators of economic health: the stock index and the exchange rate. Although Dar summoned the head of the SBP and other major banks to Islamabad to figure out responsibility, the SBP is correct in stating that currency values cannot be inflated forever. But the fact is that currency values are always inflated through interventions in the market. No central bank decides not to intervene in the market to ensure the stability of exchange rates. They ensure predictability in the economy, which is essential to understanding how it would grow. If we were to believe the finance minister that both the fall in rupee value and the sudden fall in stock values are erratic events, then it puts into question his own narrative of reforming the economy. It is clear that no structural reorganisation of the economy has taken place if our currency can be manipulated by a ‘few people’ as per the finance minister’s claim. It is clear that there needs to be an investigation into this; and going forward, the SBP and the government need to be on the same page.