The appreciation of the rupee after the IMF Board’s approval of the tranche for Pakistan was only to be expected. However, while the rally is not necessarily yet over, it should hide either the factors that were driving it down, or that they have not yet been removed. As such, they reflect the possibility, indeed the probability, that they will drive down the rupee once again. The IMF tranche seems just a bandage over a deep wound. The bleeding may have been stopped, but will the wound heal?
The recent appreciation raises the question of where exactly does the fair value of the rupee lie. The recent appreciation lends fuel to the theory that the rupee was undervalued, and greed of speculators had meant that the consumer would have to pay more for the products that were imported. Pakistan’s fundamental problem is that its imports are highly inelastic, though the same cannot be said about its exports. It has not helped that the present government has ended our autarky in wheat and sugar, and added those items to the import bill. Pakistan imports edible oil, which is made more expensive by the upward trend in world commodity prices. Then there is fuel, with oil prices also being driven upwards by post-epidemic raises in demand.
There is also expected to be an end to the rise in remittances from overseas Pakistanis, which was the result of the covid-19 epidemic. The result is continued downward drift in our forex reserves. The policy of the State bank maintaining the value of the rupee not by intervening in the market, but by sitting on a stash of borrowed dollars has been mandated by the IMF, the only problem being that no one knows for sure whether the rupee is being driven up or down by genuine supply and demand, or just speculative pressure. Pakistan must correct its fundamentals, restructure the relationship of the government to the economy as a whole. IMF Programmes are not the solution; they are merely supposed to provide a breathing space while a solution is applied. Once again, it seems that breathing space has not been used, and one result will be that the rupee will once again come under pressure, whenever the pressure from the current account deficit becomes unbearable.
