The State Bank’s liquid foreign exchange reserves were declining. On a week-over-week basis, reserves declined slightly to $13.59 billion from $13.76 billion. Even Moody’s decision to downgrade Pakistan’s sovereign credit rating due to rising external sector vulnerabilities following the floods has not slowed the rupee’s advance.
Is there a Dar factor at work? Or are we overlooking something that only he sees?
Since September 22, the Pakistani rupee has increased by 8.25 percent, rising to 219.92 to the dollar. Recently, the rupee has been the world’s best-performing currency. However, its rise contradicts several global and domestic economic statistics. For example, the dollar has risen against every hard currency, raising fears of another global currency catastrophe not seen since the Asian crisis of 1997. What is the rupee doing to resist the trend?
Then, despite rigorous import limits, the State Bank’s liquid foreign exchange reserves were declining. On a week-over-week basis, reserves declined slightly to $13.59 billion from $13.76 billion. Even Moody’s decision to downgrade Pakistan’s sovereign credit rating due to rising external sector vulnerabilities following the floods has not slowed the rupee’s advance. Moody believes that the $30 billion in economic losses caused by the floods have generated concerns about a considerably larger current account imbalance than planned in the budget, increasing Pakistan’s external borrowing needs.
Despite being perceived by the market as an interventionist advocate of a strong domestic currency, Ishaq Dar predicted on a TV show that the exchange rate would settle below 200 to the dollar in a matter of days, not weeks, reducing the nation’s public debt (in terms of the rupee) and taming imported inflation. His optimism originates from his opinion that the domestic currency has depreciated in recent months due to speculative attacks and is now on its way back to its “real worth.”
He, like his predecessor, Miftah Ismail, accuses the large banks of manipulating the exchange rate in order to make quick money. The banks are claimed to have made Rs 27.67 billion from their foreign exchange business in the first three months of the current fiscal year to September, compared to a full-year profit of Rs 37.88 billion in the previous fiscal. An investigation is now underway.
Indeed, the government’s largest challenge is the rupee’s stability. The problem, which got more acute after the reinstatement of the delayed IMF program failed to reduce market volatility, must be addressed in order to alleviate the mounting economic uncertainty. But, whatever happens, Mr. Dar should resist interfering with market dynamics, or we will soon be in the throes of a greater catastrophe.
