Central bank’s piecemeal steps to defend rupee raise questions

The central bank’s piecemeal steps to defend the rupee can do little more than slow its decline for now, but some of the measures risk hurting the already struggling economy in the long term.

The rupee’s weakness — a drop of nearly 19.44 percent or Rs30.64 since July 2021 to-date — reflects the increasing doubts of local and foreign investors on the country’s ability to tame the sky-high inflation, prop up falling growth and rein in its large fiscal and current account deficits.

The State Bank of Pakistan (SBP) has drawn criticism from economists for being too slow to respond to stave off a crisis of confidence in local currency, which worsened after Prime Minister Imran Khan dissolved the parliament to block the opposition's attempt to oust him.

Economist Dr Ashfaque Hasan said sudden appreciation in the exchange rate had "amazed him". "Are there any changes suddenly taking place in the macroeconomic fundamentals which suggest foreign exchange reserves are depleting at a faster pace and not any foreign inflows come in so far?"

Dr Khan viewed the latest episode of the currency depreciation is engineered. "The SBP’s policy of monetary tightening hasn’t addressed inflation but the hike in interest rates have increased inflation and impacted investment and GDP."

A de facto devaluation of rupee had started soon after the PTI government took over in August 2018 and it planned to seek a bailout from the International Monetary Fund (IMF) to avoid a balance of payments crisis and stabilise a wobbly economy hurt by shortage of dollars.

The central bank was patient on currency and didn't policy was not working in Pakistan? “We have to revisit and to restrategise our monetary policy. The SBP has failed to provide structural stability to rupees due to poor monetary policy,” Saeed said.

“What happened to rupee is a clear reflection of immature monetary policy, which failed to control inflation, failed to spur GDP growth and overall SBP Governor has become irrelevant for global investors and shenanigans for Pakistan.”

The SBP has been behind the present curve since 2019 and every decision from the SBP shows its panicky attitude and lack of maturity in comprehending monetary policy, Saeed added.

Bankers said dollar shortage presents a bigger problem in the economy and the central bank’s intervention to support rupee was out of question as “its reserves are dwindling”. “When the SBP-held reserves are less than $11.319 billion, how much can they possibly intervene,” a banker said.

Foreign reserves sharply fell by $1.078 billion or 5.8 percent to $17.477 billion in the week that ended on April 01, more than $9 billion less than a record high in August 2021. The reserves stood at $27.067 billion in August 2021.

Reserves held by the SBP fell to $11.319 billion from $12.047 billion a week earlier. China and Middle Eastern countries, provided additional loans of several billion dollars in recent months that were used to consolidate the foreign currency reserves.

But repayments make things worse. The country is on the cusp of political change, widely expected to infuse new life into an economy that has been struggling to break away from a tale of weak growth and high inflation.

The new government has to clean the economic mess left behind by the PTI government, though PM Khan had repeatedly bragged the economy to be a success story. Along with inflation that is running at two-year high of 12.7 percent, the next government will also inherit ballooning trade and fiscal deficits.

A sharp increase in oil prices -- Pakistan imports about 80 percent of oil needs -- has contributed to a current account deficit that widened 70 percent year-on-year to $35.4 billion during the nine months of this fiscal year. The International Monetary Fund's $6 billion programme is officially stalled with no possibility of the next tranche's approval this month.