In the last two weeks, (between March 11 and March 25), the rupee lost more than 1.8 per cent value against the US dollar in the interbank market. During these two weeks, the local currency crossed the psychological barriers of 180 and 181 to a dollar for the first time. It finally settled 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 rupee’s value from the sidelines. It did not intervene to stop the slide. The State Bank of Pakistan (SBP) left the exchange rates to remain market-driven not only as a matter of principle amidst the ongoing International Monetary Fund’s review of Pakistan as part of the process before releasing a new tranche of the loan. It also had not enough forex reserves to quell the dollar’s growing demand pressure originating from external debt servicing, import payments and forex outflows on account of divestment of portfolio funds— from both the debt and equity markets.

Unless export of workforce rises again to half a million a year, constantly high growth in remittances cannot be guaranteed

Pakistan’s liquid forex reserves held by the SBP, constantly falling since August 2021, touched a new low of $14.962 billion on March 18 from the peak of $20.074bn back in August, according to the central bank’s report released on March 24. Total liquid forex reserves (i.e. the sum of the reserves of SBP and all the commercial banks) stood around $21.44bn on March 18, down from an all-time high of $27.068bn at end-August 2021.

Nearly $15bn worth of the central bank’s forex reserves is hardly enough to cover one and a half months of merchandise imports, leaving no option for it except to refrain from intervening in the market at times when the rupee begins a new round of slide. In about nine months of 2021-22 (between July 1, 2021, and March 25, 2022), the rupee has lost 15.4pc value against the greenback. At the end of 2020-21, on June 30, the US dollar was worth only Rs157.54.

At the root of the recent rupee’s fall lie both structural and cyclical weakening of the current account (C/A) deficit. Pakistan’s C/A problems are structural because the country is far less competitive in foreign trade than the majority of its main trading partners. It keeps its trade deficit large — often equal to its total export earnings and sometimes even larger.

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

Sadly, the country is also progressing far slower than other nations in correcting structural issues of its foreign trade, in particular, and lingering issues of its C/A and balance of payments, in general.

The PTI government had come into power with tall promises of breaking “the shackles of foreign indebtedness” — the root cause of most external sector and fiscal issues. But it failed to deliver.

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

The stock of external debt on the Pakistan government alone stood at $64.141bn at the end of June 2018, just two and a half months before PTI came into power. In the next three and a half years, i.e. at the end of December 2021, this stock of debt swelled to $83.9bn, according to the latest SBP stats.

The net addition of $19.759bn worth of the government’s external debt in just three and a half years cannot be overlooked in analysing fiscal and external sector issues. Growing stocks of external debt mean larger external debt servicing and consequent pressure on forex reserves and the rupee’s health. Besides, providing for the external debt servicing in rupee terms leaves little fiscal space for development expenses.

Pakistan’s liquid forex reserves held by the SBP, constantly falling since August 2021, touched a new low of $14.962 billion on March 18 from the peak of $20.074bn back in August

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

A $4bn monthly cannot be compensated with $2.5bn average monthly remittances — even if we presume that the remittances continue. In future, the C/A management will require more serious efforts to accelerate export earnings, decelerate growth in imports of finished goods particularly luxury items.

And it will also require persistent efforts to ensure double-digit growth in remittances which seems a far cry given the fact that for about the past three years demand for Pakistani workers abroad has been on the decline. In 2019, 625,876 Pakistanis had left abroad for jobs. The number tanked to 225,213 in 2020 before rising to 288,280 in 2021 — partly reflecting the effects of Covid-19 triggered travel bans across the globe. In the Jan-Feb period of 2022, 134,134 Pakistanis have gotten overseas jobs, according to the Bureau of Emigration and Overseas Employment.

Unless export of workforce rises again to half a million a year, constantly high growth in remittances cannot be guaranteed. But is that possible? Only time will tell.

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