The rupee has been dropping despite the ending to the political uncertainty implicit in the end of the PDM-led coalition, and even after the nomination of a caretaker PM to head an interim government. To be fair, the economic fundamentals have supported a decline. After all, there has been a deline in remittances, with the $2.03 billion remitted in July down 7.3 percent over June, and the lowest in five months. Then there has been a rise in international oil prices, which has meant larger oil payments, thus creating a greater demand for dollars. However, the reason the rupee breached the Ra 300 mark on the open market, seems to have been what might be best called speculative activity. One sign is that dollars are not available in the market. Instead of being bought and sold according to the flow of international trade, investors are making purchases and then taking them off the market, and will probably hold them back until the rupee hits some higher figure.
The IMF is all in favour of this, and at the moment, is calling the shots like nobody’s business. One of its ‘red lines’ seems to be that borrowed money must not be used to defend the rupee. Though Pakistan has accumulated foreign exchange reserves in recent times sufficient for avoiding the threat of default, this is mainly because of borrowed money, and includes deposits by foreign countries which cannot be used to pay for imports, let alone be let loose on the market to defend the rupee. This IMF readiness, almost anxiety, for the rupee to sink even lower against the dollar, seems to ignore the inflationary effects of such a decline, particularly as it does not seem to take into account the chaotic effect this would have on an economy which is part of the globalised world, and which has already spent the last four decades and more pulling down various barriers and failsafes.
There must be some means of intervention available to the state Bank of Pakistan, and even to the Ministry of Finance, to intervene to defend the rupee, not to maintain some notional value, but to prevent a freefall. Such a mechanism is all the more necessary, now that speculation has set in. It is not necessary to use that mechanism. Knowledge that it exists will probably be enough to prevent speculators from going overboard.
