Spearhead Analysis – 26.04.2019
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
The Pak Rupee enjoyed an extended period of holding its value against the USD till 2017, when it traded at around Rs.105 against the Dollar. Come December 2017, the Rupee began its precipitous fall, which continues to this day with no apparent end in sight. In effect the Pak Rupee has lost over 35 per cent in value against the USD since 2017. This has translated directly into higher input costs for manufacturers, rising inflation levels, and higher debt servicing costs. The expected Export boost is still awaited with no appreciable rise to date, while efforts are underway to control imports and local purchases through higher regulatory duties and taxes. The effect is a rapidly contracting economy, with higher inflationary pressure, unemployment and declining levels of wealth – in a word Pakistan is firmly in a Stagflation phase.
The sudden disappearance of the so called parallel economy, the mainstay of the ‘regular’ economy, has dealt a lethal blow with consumer purchases, trading, real estate and investments suffering a downward trend. For the common man there is further hardship, with higher bills to pay, lower disposable income, prospects of unemployment as companies start to downsize and a severe lack of opportunities for alternative employment. For those who have wealth the impact is again drastic as their holdings have started to rapidly lose value. For those on fixed incomes there are hard times ahead.
If someone was holding Rs.10 Million in April 2017, it was equivalent to US$95,000. Today that same amount of Rs.10 Million is worth US$70,000 and projected (April 2020) to decline to the US$55,000-60,000 level depending on where the Rupee settles against the USD. If one were to go by the rumours based on expected IMF demands for a freely floating exchange rate, the Rupee could be in the Rs.165-180 range against the USD.
Around 9 per cent of the wealth was wiped out till April 2018 and another 19 per cent till April 2019 and if the Rupee loses value as expected there could be another 19 per cent of value loss till April 2020. Factoring in the interest or profit received on the original cash amount, there was still a 1 per cent loss till April 2018, another 11 per cent till April 2019 and an expected loss of another 11 per cent by April 2020.
At times people think that since they are not going to convert to USD, their Rupee savings remain intact and that they are getting higher interest rates, which compensate for the rising inflation. This, unfortunately is an illusion that is keeping bank liquidity going. When the realization sinks home that the Rupee is rapidly losing value in terms of actual purchasing power there might be pressure for withdrawals from banks as people try to hedge via conversion to USD. This in turn could balloon into a major financial sector crisis. Already there are a number of people hoarding their wealth in foreign exchange outside the banking channels, and by some estimates these amounts are much larger than what is in the banking system.
Keynesian Economics had postulated that in times of crisis the government needs to ramp up domestic spending to generate employment and spending rather than cutting development and other expenditures. In our case the government has cut down the developmental expenditures and the parallel economy has been forced to go underground due to the policies and tactics of the government. There could be an effort to incentivize and revive the undocumented economy to generate the much needed economic activity and in the process mainstream it. In addition, there is a need to check unnecessary harassment by the FBR and NAB, which has led to a virtual standstill on the economic front. The extreme extractive mode needs to be abolished and a system to encourage investment needs to be implemented through actions that send the right message. Ministers giving statements on future policies like cancellation of the 10 per cent FED on certain category of vehicles from July 1st and change in the valuation system of real estate from July 1st are not helping. It is leading to a lack of confidence and cessation of all economic activity and it is the narrative that needs to be managed by the Government to infuse confidence in the economy.
There is considerable hardship for the people of Pakistan, with gross incompetence on display in being able to manage and contain the declining trends. The political leaders continue to engage in bouts of verbal abuse degrading themselves to such low levels that one feels ashamed that they are our leaders. There is no plan, policy or discussion on tackling the economic situation and the best that the Government has been able to come up with is an Amnesty Scheme and a change in the Finance Minister. The uncertainty continues to increase and a lack of confidence pervades every aspect of the economy. The much delayed IMF bailout is likely to exacerbate the inflationary pressures and erode the value of the Rupee and one hopes that there is a plan tucked away secretly to revive the fortunes of Pakistan. In the absence of that there would likely be declining fortunes borne out of gross incompetence.