A Floating Exchange Rate | Editorial

The rupee’s continuous slide against the greenback has all the stakeholders worried. This unchecked tumble is set to have deep repercussions on inflation and imports, gnawing at the precious little foreign exchange reserves that have already hit rock bottom. In this gloomy scenario, pressure is mounting on the Q Block — the seat of finance ministry — to let market forces decide the fate of the rupee and go for a free float of the exchange rate. This extreme position is taken by no less than the lender of last resort — the International Monetary Fund (IMF) — with whom Islamabad is holding initial talks to secure a $12 billion bailout package to ride out the balance-of- payments crisis.
Given how negative fallout the free float will have on the local unit’s stability, the finance ministry’s mandarins are reluctant to acquiesce to the proposition. The rupee traded at 133.89 to a dollar in the inter-bank market on Friday. Since December last year, Pakistan has let its currency weaken by 26.6%. Still, the IMF sees this as not enough, and is asking for more. It is believed that the international lender has been conveyed that authorities are ready to let the currency depreciate further that may reflect market fundamentals. On the other hand, Finance Minister Asad Umar is reported to have begun seeking expert advice from economists on what it would entail if the country went for a free float.
Be that as it may, the picture is grim as reflected by an international rating agency’s report issued in January, a month after the Khaqan Abbasi government allowed around 5 per cent depreciation. Moody’s noted that “if the Pak rupee depreciates markedly further, the country’s central bank will face the difficult challenge of anchoring inflation expectations at moderate levels.” It went on to note that the ‘government’s debt affordability would likely weaken further, as the federal government’s one-third debt is denominated in foreign currency.’ And according to one report, each one rupee fall in the rupee value vis-à-vis the dollar adds somewhere between 85 and 100 billion rupees to the country’s debt burden. Authorities must keep these facts in mind when calibrating their response to the IMF demand.
Published in The Express Tribune, November 19th, 2018.
Source: https://tribune.com.pk/story/1850145/6-floating-exchange-rate-editorial/

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