All those who really believe they are going to let the rupee free float all the way to forex equilibrium, as apparently agreed with the IMF, please raise your hands. You must be the lot that also believes forming a committee to stop currency devaluation, as the PM has really done, is a smart idea.
But how’s Hafeez Shaikh, and the rest of the committee, going to do it? Sure, reducing amount of cash allowed abroad from $10,000 to $3,000 will save the economy something-billion a year, but it will also hinder legitimate transfers – anybody sending money for the kids’ summer fee? – and make most punters just hide their dollars under the carpet for the time being.
Still, that doesn’t tell how they’ll ‘control the currency’s value’; meaning keeping the rupee from depreciating further. Stand in the way of wire transfers between institutional dollar accounts and brokerages running digital trades in New York and Chicago? Forex for dummies comes at $2.29 on eBay. Just saying.
Point is, anybody capable of reading technical currency charts will tell you that the rupee runs at a historic five percent annual depreciation against the dollar. And whenever you keep it artificially propped up, as Musharraf’s blue-eyed Shaukat Aziz did, keeping it around 62-64 till 2008, it snaps back towards its fair, or real, value. That’s why PPP took the flak as the rupee jerked down all the way to 84-86.
Dar sb had, similarly, kept the exchange rate more or less locked at a hundred; even staked his reputation on it. That’s why longterm traders had prepared long dollar positions since around the time the Nawaz government unraveled. And now, as the rupee is fulfilling the prophecy – provided buoyancy by factors like the IMF deal and government paralysis, of course – they are laughing all the way to the bank; and its hundred percent legit.
They only laugh harder, of course, when they hear the government saying things like free-float, market forces and, better yet, committees to control the currency. That’s because it only adds to the confusion and uncertainty that is responsible for much of the mess to begin with. For proof, just look at how the currency and equity markets responded to the IMF deal and, more importantly, the PM’s currency control committee. But do note the chronology carefully.
The rupee were supposed to go topsy-turvy on Monday, since the government shook hands with the Fund late Sunday after extended weekend talks and talk of the free-float first made it to the news. But it turned out to be business as usual since the rupee was clearly kept from falling. Then it went up and down on Tuesday, again showing official support. That’s when the PM formed the committee.
Traders, naturally, took that as an assurance against volatility, especially with the prime minister himself guaranteeing that nobody would be allowed to fiddle with the exchange rate.
And then the state bank suddenly withdrew all support and allowed to rupee to go through the floor over the next two days, depreciating more than five-and-a-half percent. Then the stock market bled a couple of thousand points to reach yet new lows, just like the currency. It shouldn’t take a Hafeez Shaikh to realise that panic was going to follow. Strike a landmark bailout deal, leak hair-raising pointers (float, tariffs, etc), keep mum about everything else, and expect the dollar not to disappear from the open market? No specifics, nothing about the interest rate, or quantum of rupee death to price in?
Now, to make it right, they are planning to throw Rs20b ‘to rescue the crumbling stock market’, which is already in the red to the tune of billions of dollars in the last ten months? Sure little birds try to put out forest fires with beak-fulls of water too!
If the government is really doing something about things, it’s doing a very poor job of communicating it to everybody that is getting affected. And bad decisions here don’t mean another lad back in the pavilion prematurely, it means lives and livelihoods of real people.
And it is precisely this failure to communicate that has led to a crisis of perception in the economy, particularly the capital market. Even now the government is unwilling to learn that markets respond to sentiment to form their outlook. Consider these two things again, the float and the committee. For one thing, they are both undoable. For another, they are literally contradictions in policy. Free-float means not interfering with the market, while there’s a committee responsible for keeping currency movement in check. Reverse swing?
Also, anybody still remember good old Asad Omar? He did his bit with the narrative about the rupee too when he declared fair value after the last rout, which completed the year’s 34pc fall to bring it to around 140 to the dollar. It has reached the “real effective exchange rate,” he claimed. Now he must be thanking his stars he got axed when he did, or he’d have to eat his words all over again.
Spare a thought, then, for the poor traders who took that for what it was supposed to mean, the government’s stamp of approval, and initiated trade orders only to become real-life examples of textbook mistakes.
Whatever anybody says, Mr Market is bracing for King Dollar’s reign in the Islamic Republic. Write that down somewhere.
Disclaimer: The views expressed in this Op-ed are that of the author and do not necessarily reflect the editorial policy of Surkhiyan.