What’s the future of the Rupee?
Ten years ago a dollar was worth Rs86. Now you need Rs170 to buy a dollar. For the past ten years the rupee has been falling an average of 10 percent a year, every year.
Why? A currency is like a commodity whereby the price is determined by the forces of demand and supply.
Our exports roughly equate to the demand for rupees in the global marketplace-and our imports roughly equate to the supply of rupees in the global marketplace.
Look what we did in July-August: exports $4.6 billion (demand for rupees) and imports $12.1 billion (supply of rupees).
The supply of rupees far exceeds the demand-and the resultant fall of the rupee. The higher the supply the lower the price and vice versa.
What that means is that we are supplying too many rupees and consequently the forces of demand and supply have pushed the rupee down.
Over the 5-year PPP-period beginning in 2008, the Pakistani rupee lost 20 percent of its value against the dollar. Over the 5-year PML(N)-period beginning in 2013, the Pakistani rupee lost 26 percent of its value against the dollar. Over the 37-month PTI-period beginning in 2018, the Pakistani rupee has lost 36 percent of its value against the dollar.
In the real world, the determination of a currency’s rate of exchange is a much more complicated affair.
The rate of inflation, for instance, plays a major role. From the real world, the rate of inflation in Pakistan has been hovering around 10 percent while the same in the US has been around 4 percent.
The differential in the rate of inflation can roughly be equated to the quantum of downfall in the value of the Pakistani rupee.
The rate of interest also has an impact on the rate of exchange. Generally speaking, a higher rate of interest offering lenders a higher rate of return relative to other countries tends to attract foreign capital and cause the rate of exchange to rise.
In the real world, it gets a lot more complicated than that when investors begin to calculate the real rate of interest (which is the nominal rate less inflation).
Currently, the rate of interest in Pakistan is around 7 percent while the rate of inflation is in the double digits meaning that the real rate of interest is in the negative (thus a downward pressure on the rupee).
Then there’s Afghanistan. Before the Taliban takeover Afghanistan used to be floode with dollars and, according to money market sources, a billion dollars a year spilled over into Pakistan. That’s a billion dollars worth of supply into Pakistan.
The Biden Administration froze $9 billion, the IMF suspended $460 million, the World Bank halted $5.3 billion, the EU suspended $1.17 billion in aid and the Afghanistan Reconstruction Trust Fund (ARTF) terminated $12.9 billion worth of commitments.
The situation has since reversed-Afghans are now buying dollars on the Pakistani kerb market. That’s an additional downward pressure on the rupee.
What’s the future of the rupee? In 2018, when the PTI formed the government, a dollar was worth Rs123. Since May 2021, over the past four months, the rupee has lost an additional 10 percent.
In the next 12 months, the State Bank of Pakistan (SBP) has to pay out $15 billion. The pressure on the rupee, it seems, is relentless. If the current trajectory continues the rupee-dollar parity could test the Rs200 mark in the next two years.
A falling rupee means ‘imported inflation’. We import petrol, diesel, wheat, sugar, cotton, fertilizer, machinery, iron, steel, tea, chillies, palm oil-and the price of electricity is tied to the dollar. That means a falling rupee will usher in another round of price increases. We are trapped in a vicious cycle-and the only way out is structural reforms.
In a nutshell, a whole host of cartels-including electricity, sugar, fertiliser and automotive-have been holding our economy hostage. While these cartels are bent upon seeking ‘rent’ we need to move from ‘rent seeking’ cartels to an export-led competitive economy.
The good news is that we have a highly competent professional as SBP Governor. In my opinion, Dr Reza Baqir will not try to influence the direction of the rupee but the SBP will sell dollars to scare away speculators if and when speculators jump in.
The good news is that if the forces of demand and supply are to cause a further devaluation of the rupee, rest assured that the downfall will be orderly-courtesy SBP.
Currencies is the result of a number of interrelated elements that reflect the overall financial condition of a country with respect to other nations.