The State Bank of Pakistan has recently taken several steps – ranging from imposing cash margins on hundreds of import items to requiring the purchase of dollars to biometric verification of buyers – all aimed at avoid a further fall of the rupee.
The rupee has lost about 8.5% of its value against the US dollar since the start of this fiscal year on July 1 (it fell to $ 170.96 on October 6 from 157.54 on June 30).
The central bank is desperately trying to stabilize the exchange rate. But unlike in the past, it does not intervene significantly in the currency market for two reasons. First, learning from the mistakes of the past, the central bank has decided in principle to let market forces determine exchange rates. And second, its foreign exchange reserves which cover the import bill of goods for just over three months are not strong enough to do so, especially at a time when regional peace remains clouded after the capture of Kabul by the Taliban in mid-August.
These are tough times for those who hate to change. The pandemic gave birth to the new normal. We need to change the way we think and act.
The fall of the rupee – a 100% increase in the trade deficit (between July and September) behind it – is not new to Pakistan. But this time around, the traditional quick fix can’t work. Why?
There is little room to apply quick fixes to structural problems. In 2018-19, when the rupee lost around 32% of its value, the government borrowed heavily from âfriendly countriesâ – that was the old way of doing things.
The post-pandemic global economy has changed. And the scope of the new normal is widening. There is little room to apply quick fixes to structural problems.
Remember what Pakistan did in 2018-19 when the rupee lost around 32 pc against the US dollar? He borrowed heavily from “brother” and “friendly” countries. It was the old way of doing things.
This option is not currently available. Why? These countries (i.e. Saudi Arabia, UAE, and China) and even other countries such as US and UK that we could have admired for seeking funding from exchange have tightened controls on foreign exchange spending. (The US withdrawal from Afghanistan that many see as hasty came when Washington realized it couldn’t afford to finance an endless war.)
And, Beijing is now taking a closer look than before the release of funds for its Belt and Road initiative, according to reports in Chinese and international media. Saudi Arabia and the United Arab Emirates are focused on maintaining or even improving the import coverage ratio of foreign exchange reserves to deal with lingering uncertainties from the pandemic.
The rupee has fallen in recent months despite the fact that Pakistan, like other countries, has received its fair share of forex support from the International Monetary Fund to fight the pandemic; the country has also received a sufficient amount of free vaccines from the World Health Organization and friendly countries and part of its external debt has been rescheduled.
This is the new normal. The wealthiest countries individually, as members of the global collective as well as international institutions, are realizing their responsibility to help economically poor countries avoid currency crises linked to the pandemic. But there is another new normal.
Scientifically advanced countries that led vaccine development programs and initially shared these vaccines for free with other countries are now earning billions of dollars in increased exports of vaccines and pharmaceutical and healthcare products. Export demand for this category will certainly remain strong for the foreseeable future.
And countries that are not prepared to tap this potential demand would remain a net importer of vaccines and pharmaceutical and health products. Pakistan is one of them, although it is now trying to expand the base of its pharmaceutical industry and boost pharmaceutical exports. Likewise, the country only recently started exporting Pakistan-made cellphones with foreign collaboration to reduce net imports of smartphones that consume more than $ 1 billion annually. Meanwhile, the SBP has made bank financing of imported automobiles more difficult – to lower the overall bill for imported goods and reduce the trade deficit.
The new standard in managing external accounts is: do what it takes to become a net exporter of something big – and do it fast. Or stay dependent on imports – and let the trade deficit increase and the local currency decline.
The global containerized freight rate index has more than tripled in the past nine months. The index rose from $ 3,143 in December 2020 to $ 10,323 in September 2021, mainly due to pandemic-related disruptions and an increase in global trade as economies began to recover from the 2020 recession This has led to a greater increase in the cost of exports and imports from countries like Pakistan, which have the least developed local maritime industry.
This phenomenon is the new standard in international trade. But developing the local maritime industry in the short term is not possible because it requires huge funds, vast expertise and a lot of time. This means that Pakistan’s service import bill will continue to rise, putting pressure on the overall trade deficit (goods and services).
This raises another critical issue. That is, Pakistan’s historic inability to increase its trade with its neighbors. Of our four neighbors (Afghanistan, Iran, China and India), we have always maintained friendly relations only with China. With Afghanistan and Iran, our trade relations have remained erratic both because of our bilateral problems and the sanctions imposed on Iran by the West. As for India, the less the better.
Liberal trade with immediate neighbors would eventually become another new normal very soon, further boosting the growth of intra-regional trade. But it cannot be predicted when exactly the nations of South Asia will learn to resolve their conflicts amicably and embrace this new normal.
Posted in Dawn, The Business and Finance Weekly, October 11, 2021