The reports of Ishaq Dar’s return to Pakistan and his takeover of the Finance Ministry caused the rupee to rise against the dollar. This indicated the markets’ recognition that Mr Dar’s main claim to fame was the defense of the rupee, and that he would take steps to bring it down. What exactly transpired in his meetings with forex dealers and banks is not known, but they did not produce any policy measures. However, the rupee started rising. Now, it seems the honeymoon is over, and the rupee has started falling again. How far will it go? One prediction is that it will go to 250 to the dollar, which would be a historic low.
This cannot be reconciled to Mr Dar’s statement that a fair value is around 200. However, the market seems to have started rebounding from Rs 220, which indicates that Mr Dar’s analysis is incorrect. Mr Dar has perhaps over-estimated the effect of the exchange rate on inflation, the real problem he was sent to tackle, while the exchange rate leaves the average voter cold, inflation determines how voters will choose. Imported inflation cannot be ruled out entirely, but it certainly is not as great a cause as Mr Dar assumes. It seems to have led him to miss the full impact of the recent floods. While getting off the FATF grey list is good news, it should not lead Mr Dar to avoid the inevitable conclusion that the fundamentals of the economy remain unsound.
Mr Dar has not tried yet to do what he had done in previous tenures, to use the country’s forex reserves to prop up the rupee by throwing them into the market and thus reducing their price. Mr Dar must resist the temptation of possibly using the country’s already meagre reserves. One major reason for the reversal of the price decline was that Mr Dar’s arrival had prompted owners of foreign exchange, including speculators, putting their dollars up for sale to avoid taking too big a hit. Those dollars have now been absorbed, and the market is left with the normal sources of dollars: exports and remittances. Neither have spiked. Also, oil bought before he came has now been used up, and oil importers are adding to the demand for dollars. Instead of addressing the fundamentals of the economy, or even taking the sort of anti-inflation measures that would appeal to the voter, with a year to go to elections Mr Dar has so far merely given textile exporters a power price freeze; at the taxpayers’ expense.
