After a couple of rough weeks, the Pakistan rupee settled at around 150 against the US dollar before Eid on June 5. Over the previous three weeks, the local currency had fallen to 155, an all-time low, against the dollar from around 140 at the start of trading on May 15.
The rupee’s latest slide came after the government’s agreement over a three-year bailout deal worth $6 billion with the International Monetary Fund (IMF). The IMF has repeatedly asked Pakistan to let the local currency’s value be ‘market determined’ throughout its negotiations with Islamabad over the past eight months. The same condition was reiterated during the final bailout agreement.
The decline in rupee value means the currency has fallen by over 40 percent since December 2017. Sources within the finance ministry revealed that former finance minister Ishaq Dar had artificially kept the rupee afloat around the 105 mark against the US dollar. He did so through his contacts at the State Bank of Pakistan which artificially pumped dollars into the foreign reserves, the sources say.
“Ishaq Dar wanted to keep the rupee’s value around 100, which is where it remained for the entirety of his tenure as the finance minister because he felt that was the psychological barrier for the currency. He also maintained that letting the rupee fall would lead to rise in inflation and public debt,” said an official from the ministry.
The critics of Dar and his party, Pakistan Muslim League-Nawaz (PML-N), say that the sole purpose of artificially keeping the rupee value high was to inflate the previous government’s numbers ahead of last year’s general elections in July.
Dar’s successors from the PML-N, Miftah Ismail and Rana Afzal Khan, gradually withdrew artificial support to the rupee in December 2017, bringing the currency down from 105 to 115 against the US dollar, before the caretaker government took over in June.
By the time the incumbent Pakistan Tehrik-e-Insaf (PTI) government took charge in August 2018, the rupee had fallen to 128 against the US dollar.
Since the PTI government led by Imran Khan was elected to power, economic analysts had maintained that going to the IMF was inevitable for Pakistan given the dire economic numbers. These included PML-N’s Miftah Ismail and Raza Afzal Khan, who had taken over the finance ministry after Dar.
However, the PTI’s pre-election rhetoric against going to the IMF meant the then finance minister Asad Umar had to look elsewhere to plug the growing current account deficit. Over the next three months, Pakistan received aid and loans from Saudi Arabia, the United Arab Emirates, China and Malaysia, cumulatively worth $18 billion.
Even so, since the turn of the year, it became increasingly evident that an IMF bailout deal could no longer be avoided. In April, the
IMF asked Pakistan to replace Asad Umar with former finance minister Hafeez Shaikh, who led the negotiations as the prime minister’s economic advisor when the terms were finalised with the Fund in May.
“We eventually realised that there was no other choice but to go to the IMF. But in accordance with our election promises, we first made sure that we explored all possible options. However, the balance-of-payment crisis that we received was the worst in history, with the economy never having been in such a condition,” said Umar.
The former finance minister’s critics, however, maintain that it is precisely the delay in agreeing to terms with the IMF that has aggravated Pakistan’s financial crisis. The PML-N, now the largest opposition party, has further condemned the PTI for putting the entire onus of the economic turmoil on the previous government.
“The moment they took charge in August (last year) they should’ve decided whether or not they wanted to go to the IMF. Had they made up their mind at that time, the IMF terms would’ve been different, and the economy would not have deteriorated so much,” said Shahid Khaqan Abbasi, former prime minister and senior PML-N leader.
Abbasi, who has also served as the petroleum minister, added that the rupee’s value would’ve been around 125-130 had the deal with the IMF been agreed then.
“IMF would’ve required some price hike for gas and power and other reforms, which could’ve been implemented then. But the government has focused instead on putting the entire blame on us. Let’s not forget that Dar was the only finance minister ever who successfully completed an IMF programme with low inflation and high growth,” Abbasi adds.
Despite the staff-level agreement with the IMF, there is uncertainty over the terms of the bailout deal. Shaikh is yet to reveal what IMF requirements exactly are, prompting speculation in various quarters, including the foreign exchange markets. Analysts note that the speculation is creating further volatility in the rupee-dollar exchange rate.
“The volatility in the market will continue, and the rupee could fall to as low as 200 against the US dollar over the next six months. The deficit and debt will require further rupee deterioration,” said economist Dr Qaiser Bengali, the government’s former consultant for economic affairs.
KK Shahid is an Islamabad-based reporter and a member of
101Reporters, a pan-Asia network of freelance writers.