The State Bank of Pakistan (SBP) allowed the rupee to slump by almost four per cent last week for a third time in seven months amid growing signs of a balance of payment crisis and speculations that the country will be forced to knock at the doors of the International Monetary Fund (IMF) sooner than later for its support.

The successive rounds of currency devaluation that saw the rupee slip from Rs105 to a dollar to Rs122 in 11 months have also reinforced suggestions that Pakistan’s $300 billion economy is on the brink of a meltdown. But is it?

Economists like Karachi-based Asad Sayeed don’t agree with this talk of ‘gloom and doom’. “No, the economy is not on the brink. There’s a recurring balance of payments crisis, which we’ve seen many times before,” he argued.

Others like Ali Asghar Poonawala, a senior financial analyst at AKD Securities, agree. “The devaluation shows signs of vulnerability in the economy as foreign currency reserves are depleting on a widening current account deficit that may push us back into the lap of the IMF for another bailout.”

He continues: “Pakistan’s macroeconomic picture has always been a tale of missed opportunities. The present currency crisis is another reminder of what we didn’t do to fix the economy when we had the opportunity. It means we are again in for belt-tightening measures for another few years.”

“Pakistan’s macroeconomic picture has always been a tale of missed opportunities”

At her maiden press conference, caretaker Finance Minister Shamshad Akhtar referred to four problems facing the economy: widening current account deficit, growing budget deficit, increasing debt and loss-making public sector enterprises. But she also pointed out that ‘the real economic sector was strong, economic growth was broad-based and inflation was (still) low’.

“Our top problem is the current account deficit that is running at a much faster pace than anticipated (and stood at over $14bn, up by 50pc from last year, in the first 10 months of the present fiscal against the full-year target of $8.9bn),” she was quoted by media to have stated, defending the central bank’s decision to let the rupee weaken.

Many question the decision to abruptly devalue the currency, contending that it will push inflation and increase the cost of credit without helping the country’s exports as expected. But the caretakers had nowhere else to turn to stop depletion in reserves that have declined to about $10bn or equal, less than two-month’s import bill.

“The currency devaluation doesn’t fix the economy in the short run. But this move is a response to depleting reserves. So it’s a matter of judgment at what point the SBP should stop defending the rupee with its dollar reserves,” Sayeed explained.

“This is a matter of day to day handling. The choice before the caretakers was to deplete the reserves further by keeping the value of the rupee intact or to preserve foreign exchange reserves and let the rupee slide. They chose the latter. They had to take a decision.”

But analysts warn that currency devaluation alone will not work. Unaccompanied by structural reforms to fix the economy, all that devaluation does is increase the import bill that will push inflation, raise the cost of credit, widen trade gap, slowdown growth and force more external borrowings, they add.

Though exports have registered an increase of above 15pc in 11 months to May because of currency devaluation and cash subsidies allowed to textile and other exporters of manufactured goods, imports too have shown no signs of relenting and have risen by 14.3pc. It has resulted in a widening trade gap of around $33bn against the original full-year target of $25.7bn.

“The rupee depreciation does have some benefits indicated by growth in textiles and food commodity exports where price is largely the only competitive advantage in the global market as these exports are low value-added goods,” said Poonawala.

“Even so, a weak rupee is likely to have a limited impact on curtailing the twin deficits, particularly when our economy continues to rely on consumption-oriented growth (total consumption expenditure accounted for 82pc of GDP growth in FY2018) as key necessities for sustaining this growth (energy, edible oils, plastics, vehicles and parts) are imported and undergo an obvious rise as well.

“Focusing on value added exports is key here, which can only be done if we have an environment that furthers innovation, technology and job creation.”

Faisal Mamsa, the chief executive officer of Land Mark Capital, agrees. “Our imports are inelastic but more so because we lack the infrastructure to benefit from a weaker currency. For example, over the last 10 years, our exports have moved in the $20-25bn range whereas countries have doubled and quadrupled their exports.”

Analysts say the fresh devaluation move may help Pakistan meet the IMF’s criterion for a new bailout.

“It gives a signal to the IMF that Pakistan is doing its homework ahead of a possible loan programme,” Mamsa concluded.

Published in Dawn, The Business and Finance Weekly, June 19th, 2018