EXCHANGE rates are extremely vital for economies under the influence of the International Monetary Fund (IMF). However, the pertinent question is: why and in what manner? Numerous factors contribute to this, including exchange rates, which are a cost to businesses because they are incurred when a commission is paid on converting one currency into another currency.

The businesses that hold assets in currencies other than the Pakistani rupee are particularly exposed to the risk of exchange rate fluctuations. Besides, exchange rate volatility influences export and import prices, affecting the country’s balance of payments.

Hence, when the exchange rate fluctuates, it causes a spike in domestic inflation, first in terms of producer prices and subsequently in consumer prices. The impact of shocks on price variables at different stages of the supply chain is different. In recent years, the government has signed credit agreements with Saudi Arabia, the United Arab Emirates (UAE), China and the IMF. These bailout packages and loans are short-term in nature and seem lucrative at first glance. However, usually they create a new crisis in the long run as the debt matures and the government gets into a monetary crisis again due to inadequate federal reserves.

In mid-November last year, the US dollar recovered after a week of losses to achieve a new all-time high of Rs175.73 in the interbank market. This situation is fluid and necessitates intervention by the State Bank of Pakistan (SBP). Regrettably, there has been no discernible change. The dollar continues to strengthen against the rupee and will continue to do so unless substantial efforts are made to halt this critical exchange rate movement.

It appears that a market-based exchange rate system is inappropriate for the economy, given the country’s long history of significant balance-of-payment problems. So, what are our alternatives now? The previous government’s strong-rupee policy, effectively fixing the rupee against the dollar at a rate that the IMF deemed excessive, forced the country to burn up its foreign currency reserves to defend the rupee. Should we go for it?

As of now, Pakistan’s economy is exhibiting no signs of resurgence, and foreign exchange reserves have been falling because of excessive reliance on debt servicing. The IMF recently decided to resurrect a $6 billion bailout programme for Pakistan, bringing significant respite to the country’s beleaguered economy. Besides, we agreed to have legislation passed on central bank’s autonomy. Without a doubt, Pakistan is virtually under the IMF control. The $4.2bn assistance from Saudi Arabia might be sufficient to maintain the domestic currency in the short term, but it will not be sustainable in the long run.

I believe that the government and the SBP appear overconfident and are relying on overseas remittances rather than implementing an effective monetary policy. The government should avoid comparing Pakistan with developed and emerging economies. It should recognise the importance of exchange rates in our specific circumstances and work to keep it stable in order to manage the consumer price index (CPI) which will help keep the price range of everything within reach of an average Pakistani household.

The SBP must reflect on its current policies and seek to stabilise the economy, or else the country would be on the verge of a financial meltdown. The local market for project financing in Pakistani rupee should become more developed and diverse, including state-owned, development, regional, private commercial and capital markets. If we are serious in putting Pakistan’s economy on the right track, we must remember that the economy never changes unless the government makes it a top priority.

Hafiz Muhammad Usman Rana
Birmingham, United Kingdom

Published in Dawn, January 19th, 2022