Behind the humiliation of the rupee – Newspaper

In the last two weeks (between March 11 and 25), the rupee lost more than 1.8 percent of its value against the US dollar in the interbank market. During these two weeks, the local currency crossed the psychological barriers of 180 and 181 per dollar for the first time. It finally closed at 181.78 per US unit on March 25 from 178.51 on March 11.

The central bank watched the rapid decline in the value of the rupee from the sidelines. He did not intervene to stop the slide. The State Bank of Pakistan (SBP) let exchange rates remain market-driven not only as a matter of principle amid ongoing International Monetary Fund review of Pakistan as part of the process before releasing a new tranche of the loan. also had not enough foreign exchange reserves to quell growing demand pressure for the dollar stemming from foreign debt servicing, import payments, and foreign exchange outflows due to portfolio fund divestment from both debt and equity markets .

Unless labor exports rise again to half a million a year, a consistently high growth in remittances cannot be guaranteed.

Pakistan’s liquid foreign exchange reserves held by the SBP, in constant decline since August 2021, hit a new low of $14.962 billion on March 18 from a peak of $20.074 billion in August, according to the report from the central bank published on March 24. Total liquid foreign exchange reserves (that is, the sum of the reserves of the SBP and all commercial banks) was around $21.44 billion on March 18, down from the all-time high of $27.068 billion at the end of August 2021.

Nearly $15 billion of the central bank’s forex reserves are barely enough to cover a month and a half of merchandise imports, leaving it no choice but to refrain from intervening in the market as the rupee begins a new round. of fall In approximately nine months of 2021-22 (between July 1, 2021 and March 25, 2022), the rupee has lost a value of 15.4% against the dollar. At the end of 2020-21, on June 30, the US dollar was worth only Rs 157.54.

At the root of the rupee’s recent decline is both the structural and cyclical weakening of the current account (C/A) deficit. Pakistan’s A/C problems are structural in that the country is much less competitive in foreign trade than most of its major trading partners. It runs a large trade deficit, often equal to its total export earnings and sometimes even higher.

And it is cyclical because the country has been trying to be more competitive in foreign trade and making a series of efforts to support the export sector. But a disturbing aspect of Pakistan’s A/C deficit and the resulting decline in the value of the rupee is that, unlike other countries that have gone down this path, Pakistan is taking much longer to naturally correct this cyclical exchange rate depreciation.

Unfortunately, the country is also making much slower progress than other nations in correcting structural problems in its foreign trade, in particular, and persistent problems in its A/C and balance of payments, in general.

The PTI government had come to power with great promises to break “the chains of external indebtedness”, the main cause of most of the fiscal and external sector problems. But he didn’t give up.

Editorial: We are almost back to the point where the previous PML-N configuration had left the economy.

The Pakistan government’s external debt balance alone stood at $64.141 billion at the end of June 2018, just two and a half months before PTI came to power. In the next three and a half years, that is, at the end of December 2021, this debt stock amounted to $83.9 billion, according to the latest SBP statistics.

The net addition of $19.759 billion to the government’s external debt in just three and a half years cannot be overlooked when looking at fiscal and external sector issues. Growing foreign debt stocks mean higher foreign debt servicing and consequent pressure on foreign exchange reserves and the health of the rupee. Furthermore, servicing external debt in rupees leaves little fiscal space for development spending.

Pakistan’s liquid foreign exchange reserves held by the SBP, in constant decline since August 2021, hit a new low of $14.962 billion on March 18 from a high of $20.074 billion in August.

It is true that the PTI government has addressed the structural problems facing the remittance sector and Pakistanis abroad are now sending home much larger amounts of remittances ($30 billion a year) than in 2018 ($19.6 billion). But on the other hand, the goods trade deficit has also become too large at the same time. In 2017-18, the trade deficit for the full year was $37.6 billion. Against this, the deficit in just eight months of 2021-22 stood at $31.9 billion, according to the Pakistan Bureau of Statistics. The trade deficit for the full year appears set to reach close to $48 billion or $4 billion per month on average.

A monthly installment of $4 billion cannot be offset by average monthly remittances of $2.5 billion, even if we assume that remittances continue. In the future, C/A’s management will require more serious efforts to accelerate export earnings, slow down the growth of imports of finished goods, particularly luxury goods.

And it will also require persistent efforts to secure double-digit growth in remittances, which seems a long way off given the fact that demand for Pakistani workers abroad has been in decline for the last three years. In 2019, 625,876 Pakistanis went abroad in search of work. The number dropped to 225,213 in 2020 before rising to 288,280 in 2021, partly reflecting the effects of Covid-19-triggered travel bans around the world. In the period from January to February 2022, 134,134 Pakistanis obtained jobs abroad, according to the Bureau of Emigration and Overseas Employment.

Unless labor exports rise again to half a million a year, a consistently high growth in remittances cannot be guaranteed. But is that possible? Only time will tell.

Published in Dawn, The Business and Finance Weekly, March 28, 2022

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