The ticking bomb | By Farrukh Saleem


The ticking bomb

The State Bank of Pakistan (SBP) insists that the value of a United States dollar is Rs226. Out in the open market a US dollar costs Rs255.

This difference is a new record even in Pakistan’s 75-year rather checkered financial history. The SBP is using currency controls as a policy tool. Bad idea.

Currency controls are artificial “measures implemented by a central bank to manage the flow of capital in and out of a country, and to influence the supply and demand of the domestic currency.”

The SBP has two goals: to stabilize the value of the rupee and reduce the risk of capital flight. Will the SBP be able to achieve its goals by imposing artificial currency controls? The Bank of England tried-but failed.

Here’s a list of central banks that tried currency controls but failed: Banco Central de la República Argentina, Banco Central de Bolivia, Central Bank of Egypt, Central Bank of Nigeria, Reserve Bank of India, Banco Central de Venezuela, Bank of Ghana, Bank Markazi Iran, and the Central Bank of Tunisia.

The SBP’s imposition of artificial currency controls have so far had the following unintended consequences: the Karachi-based 200-plus members of the Overseas Investors Chamber of Commerce & Industry (OICCI) have been unable to repatriate dividends (around $1 billion); the two-dozen foreign airlines operating in Pakistan have been unable to repatriate their ticket sales ($225); and domestic industry has been unable to open import LCs.

The SBP’s imposition of artificial currency controls have so far shut down the following industries: Suzuki Motors, Indus Motors, Bolan Casting, Dawlance, Eli Lilly, KIA Motors, Nishat Chunian, Baluchistan Wheels, Bismillah Steel, Millat Tractors, Saif Textile, Hi Tech Feeds and Frontier Ceramics (this list is not exhaustive).

Two things have happened in Pakistan as a consequence of currency controls: a black market for foreign currency and economy-wide inefficiencies by distorting prices.

To be sure, currency controls discourage foreign direct investment. All of this will lead to two things: a decline in economic growth and a decline in living standards.

We are sitting on a ticking bomb. Currency controls have led to catastrophic consequences in Argentina, Bolivia, Egypt, Nigeria, Venezuela and Ghana.

This is a “time-sensitive element to the situation, as if there is a bomb that is counting down to an explosion.” This has the potential to cause serious damage to our economy if not handled properly.

We are sitting on a ticking bomb. This ticking bomb can have three serious ramifications: a sudden 20 percent to 25 percent devaluation of the rupee; a rate of inflation approaching 50 percent and a sharp decline in living standards of Pakistanis.

Of the 232,117,109 Pakistanis no one knows what the rupee-dollar parity ought to be. The SBP does not know what the rupee-dollar parity ought to be.