The sudden drop in Rupee’s value and the subsequent drama that followed it have been overshadowed to much extent by the Panama leaks JIT and its report. This is probably why there was no significant chatter in the air regarding the on-going tussle between State Bank of Pakistan and Finance Minister Ishaq Dar about who allowed the currency to drop 3pc in value in a day and most importantly why. The State Bank and Finance Ministry gave divergent explanations to the phenomenon presented equally opposing solutions, with the SBP governor suggesting to let Rupee drop to its natural value and Ishaq Dar vowing to bring the responsible persons to the book. Financial repercussions aside, this shows the lack of communication and coordination between the top institutions responsible for regulating and managing the economy of country. That in itself is huge warning sign for the policy makers and top leadership.
The narrative adapted by State Bank officials is that although they didn’t play any part in Rupee’s slide, it was a natural and market induced move health for the economy. Everybody in the financial markets as well as institutional voices like the IMF agree that the rupee is overvalued versus the dollar and a devaluation is now inevitable. Since the beginning of the fiscal year, the current account deficit has more than doubled in only 11 months, which means that situation has only worsened in past 11 months. The balance of trade on goods and services has dropped by $6bn, a decline of almost one-third, meaning the competitiveness that is being eroded needs far more robust support than it did the same time last year. So, the situation has deteriorated considerably from the time the 17.5pc figure was released by the IMF, and the longer one delays and drags out the inevitable, the greater the eventual “jolt” the economy will have to face.
The rupee is, in fact, being artificially propped up at its present level, and what happened last Wednesday was a small trailer of what is to come if action is not taken quickly to deal with an external sector which is deteriorating at an accelerating pace. Consequences of a disorderly adjustment would be catastrophic to the growth patterns of economy. The government seems in no position to take nay bold step that can make it look weak economically despite the facts that such a normalization urgent and due for a long time. The best course of action in this situation is to leave the currency deregulation with one institution that has legal mandate to do so i.e. State Bank of Pakistan. Finance minister has no authority to superficially prop up the Rupee value just to improve the economy aesthetically. The SBP governor should resist all these out-of-authority moves by the ministry to dictate the governing body in matters of its own control. Federal minister is suffering from myopic views of economy, no farther than the current tenure but the governor will be here for much longer time. If he doesn’t take matters into his own hand now, it may be too late in no time.