Rupee devaluation: a prelude to IMF bailout

With foreign reserves dwindling because of increasing imports and declining exports, the government needs an International Monetary Fund bailout to avert a balance of payments crisis similar to the one it suffered in 2013, when it sought IMF help. On Friday, the rupee slumped to 109.50 per dollar at one point after opening at Rs. 105.50, then closing at Rs. 107 per dollar. It appears to be an effective devaluation by the State Bank of Pakistan, as it said that a weaker local currency would help the economy grow and contain balance of payments pressure. The SBP had previously attempted to devalue in July but the move was reversed by the-then Finance Minister Ishaq Dar, who claimed he was unaware of the central bank’s plan and ordered an investigation. The nation has been listening to the rhetoric and claims of former Finance Minister Ishaq Dar about economic growth of 5.3 percent, and highest-ever foreign exchange reserves.
Chairing an emergent meeting of the finance ministry officials in July, 2017 he expressed concern over the unprecedented increase in the interbank rate of the US dollar against the Pakistani rupee that had touched Rs.108.25. He had summoned the presidents of all banks to review the situation, and it was decided in the meeting that exchange rate of Rs. 105 per dollar would be maintained. But it is not possible to stop the decline in Pakistan rupee value through artificial means, as it is the market forces that determine the exchange rate. In 2016-17, Pakistan’s imports were registered at $51 billon and its exports at $19 billion, hence the demand for dollar increased, and value of rupee declined. The trade deficit was $32 billion, and with $18bn expatriates’ remittances, the current account deficit was $13bn., which appeared to be unmanageable.
It is unfortunate that despite fall in the oil prices in the international market, the gap between imports and exports continued to increase during the last three years. The fresh statistics have caused concerns about long-term sustainability of the external sector. Owing to the swelling trade deficit, the balance of payments of the country is now projected to worsen to levels never seen in the past. Independent economists say the ballooning trade deficit has finally exposed vulnerabilities of Pakistan’s economy. Despite incentives offered by the government, exports are not picking up, as these packages have remained partially funded causing resentment among exporters. One would not understand how the IMF and other financial institutions have been drawing a rosy picture about Pakistan’s economy, when it failed to meet the targets of fiscal deficit, trade deficit and current account deficit.
It means that to manage economy, Pakistan will have to fall back on the IMF and other international finance institutions, and will have to accept the conditionalites attached with the loans that are more often than not against the national interest. Otherwise also, Pakistan’s problem is growing public debt, as debt services – loan installments and interest – would consume about 33 percent of the federal revenue. Unprecedented growing public debt on one hand limits the capacity to build strong defence and on the other limits fiscal space to invest in human development and infrastructure. Unfortunately, Pakistan faces major challenges of income, gender, health and educational inequalities in extreme forms. Over 25 million school-age children are estimated to be out of school; more than 3.7 million of our labor force is unemployed; and about half of total population is victim of food insecurity. This could lead to chaos, uncertainties and even anarchy.