US investment bankers Goldman Sachs has produced a report predicting the decline of the rupee, just as it began rising once again after two months of falling against dollar, following administrative measures and anti-smuggling operations, even as the SBP forex reserves fell to their lowest level since July. It seems that former Finance Minister Ishaq Dar was merely expressing a financial orthodoxy when he said that inflation was mainly imported, and tried to bring down the rupee parity, so as to decrease inflation. The caretakers, and their backers, apparently share this view, and have tried to reduce inflation by bringing down the rupee parity.
The way the rupee has been declining of late shows that the administrative measures taken may have gone as far as they could, and now there is nothing left.
Actually, there is some truth in the view that a declining rupee causes inflation. One of the main effects of a change in the exchange rate is the cost of oil. The decline increased the effects of an increase in the cost of fuel, which the IMF insisted could not be given any subsidies, but its decline enabled two consecutive fortnightly decreases in the fuel price. That meant that not only was there a direct decline in the cost of maintaining a vehicle, but fares and goods transport costs would decline. Further, the cost of fuel, a pass-through item for the electricity consumer, would decline, However, even before either of these two events could occur, the rupee has begun sinking again, even though inflation, according to the latest Sensitive Price Index reading, is still running at 35 percent, still punitively high.
That means that the man in the street continues to suffer, but it further means that the tendency continues of people leaving the corporate sector, and moving into areas like real estate, which are not as heavily taxed. The disadvantages of being a corporate employee means having to bear the brunt of taxation, with the recent increase in income tax slabs coming as an example. There is no apparent will to tackle the real problems of the economy. But simply to keep the IMF happy, which seems to mean continuing to inflict pain on the consumers, with taxation being inflicted through power bills as well.
