Pakistan’s external debt is hovering around the dreaded $100 billion mark, currently at $93 billion, which is almost a third of the national GDP. Meanwhile, the State Bank’s reserves have fallen by a staggering 25pc in the last 12 months, to now valuing $12 billion.
This in a nutshell is why the rupee went bonkers around this time last week, ending the trading day last Tuesday at 115.5 against the US dollar, tracing a new all-time low a mere four months after rewriting the record books for the wrong reasons.
This was a 4.4pc single day fall from the day before, when the value stood at Rs110.5, which itself was a value that had come at a 4.7pc drop in December.
What has been reported is that the State Bank of Pakistan caused this collapse in rupee value and withdrawing support for the rupee value. These reports have often implied that there was a voluntary thought process that went in the action, whereas the reality is quite simply that it was an organic collapse triggered by the aforementioned lack of dollars in the reserves.
This simply means that since the State Bank of Pakistan already has a depleting reservoir of dollars, it can no longer continue to pump the American currency into the market to keep a demand supply disparity that had allowed the dollar price to hover around the Rs100 mark for much of the past five years.
If Riyadh and Beijing’s attitude in last month’s FATF meeting in Paris is anything to go by, both the countries will be increasingly wary of supporting Pakistan in the near future, especially when it comes to financing
And hence when there are no dollars to address the mounting demand, which the SBP spokesperson Abid Qamar was owing to “some payment pressures which are building within the market.”
Another State Bank statement outlined the future course of action as to let “market-driven adjustment in the exchange rate to continue to contain the imbalance in the external account and sustain a higher growth trajectory.”
Again, this is no ‘plan’ that has been carved out as a strategy to overcome the falsely valued currency, but simply a natural reaction to market realities.
Even so, Miftah Ismail, the adviser to the prime minister on finance, revenue and economic affairs, and the de facto finance minister echoed similar claims that the government had ‘halted’ the prices.
“We have halted it at Rs115, which is where the market will settle in a day or two. Although the money exchangers are carrying quite a big gap, the market will settle at Rs115,” he said in an interview to a local news channel.
However, what Miftah Ismail won’t talk about is the fact that IMF has predicted Pakistan’s current account deficit to approach $16 billion – roughly the same amount that the SBP had it its reserves before a quarter of it was slashed in a year.
What he won’t talk about either is the $24 billion external finances, and another quarter of that in debt service cost that the country needs.
What he won’t mention is that Moody’s said in July that the Pakistani currency was overvalued by a factor of five – 20pc away from its actual value.
And what he definitely will not be allowed to say is that a significant factor in the currency’s plunge over the past little over a quarter is that Pakistan’s usual friends, the likes of Saudi Arabia and China, haven’t bailed the country out with grants.
If Riyadh and Beijing’s attitude in last month’s FATF meeting in Paris is anything to go by, both the countries will be increasingly wary of supporting Pakistan in the near future, especially when it comes to financing.
While the Financial Action Task Force’s grey-listing of Pakistan, does not directly impact bilateral agreements with the states just yet, an increase in scrutiny of how the country is dealing with the money it is getting – which a proven record and history of mishandling finances – will only further parry away friends and foes alike.
Amidst the rupee dive, Venezuelan bolivar had its last three zeroes knocked off by President Nicolas Maduro in a desperate bid to halt the economic slump in the country. While Venezuela remains an extreme economic catastrophe, it also is a lesson for what happens when current account deficit goes irreparably bonkers.
The question for now remains: the rupee has dived and has backstroked – will it float till the general elections?