The Pakistan rupee is in free fall, and there seems a reluctance to do anything about it. The rupee lost considerably in the previous week, and the weekend seems likely to cause only a temporary break. The inexorable downward slide of the rupee is likely to continue. The State Bank of Pakistan has ruled out the possibility of borrowing and pouring the dollars thus obtained into the market, a tactic famously used by the previous government’s financial czar, Ishaq Dar. The other option, which can be taken when the Monetary Policy Committee meets, is to raise interest rates. That will attract only ‘funny money’ which will flow out as soon as it finds a more attractive interest rate abroad. However, as the agreement with the IMF precludes this, this will not be taken. It cannot escape notice that Pakistan’s foreign exchange reserves are at record levels. That same understanding with the IMF prevents the use of the reserves for the purpose of defending the rupee.
Perhaps the more worrisome aspect of the whole affair is that one major reason for the downward pressure on the rupee has been the need to make payments for imports. These are not payments for luxuries, but for food and fuel. Another complicating factor has been the closure of Afghanistani banks, which has meant that there has been downward speculative pressure on the rupee.
The biggest problem for the government is that the devaluation is going to cause an inflationary spiral. Imported goods are going to be more expensive, with the cost being passed on to the consumer. One rise the government can ill afford is the rise in the fuel surcharge in electricity bills. Not only will consumers be affected as manufacturers and commercial enterprises increase their prices to meet higher bills, but they will have to pay higher bills themselves. How exactly he government plans to extricate itself from his straitjacket is yet to be seen. It will take some doing.