Why is the value of the Rupee depreciating, your honour?

Published: November 13, 2013

The State Bank can stabilise the market by selling US dollars in the market which basically maintains equilibrium between the demand and supply of US dollars. PHOTO: AFP

“Could you please explain to the committee the factors that have resulted in the sharp depreciation of the Pak Rupee recently? In addition, please enlighten the honourable members of parliament about the possible measures the government is likely to take in order to avoid this in the foreseeable future,” inquired the Chairperson of the Senate Standing Committee on Finance.

This was the moment I had been waiting for since the day I started my research associate-ship in Pakistan’s Upper House of Parliament, the Senate. I was, finally, about to see the executive being held accountable by the representatives of the people. The bureaucrats present at the meeting, however, justified their response quite shrewdly.

A senior bureaucrat replied saying that any statement or views expressed by the finance ministry officials or by the governor of the State Bank of Pakistan (SBP) may lead to more volatility in the foreign exchange market. Hence, any detailed discussion must be avoided.

The question I boggled my mind, which several senators also raised, was that if such excuses are so regularly employed by the bureaucracy and other government functionaries then how is the parliament going to hold the executive accountable?

Someone suggested that a private meeting should be held in order to obtain a detailed briefing from relevant officials. As expected, no such meeting took place. The officials present, escaped the rigorous questioning that senators are usually subjected to, having employed one simple statement,

It’s not in the national interest.”

So, let us analyse the argument which was proposed by the bureaucracy that day.

Was the argument reasonable?

I found it immensely surprising that the executive branch of the state refused, so clearly, to answer the questions put forward by the legislature of the country. In this case, the oversight function of parliament would be reduced to just a theoretical concept. If members of parliament cannot exercise their right to question the executive or hold it accountable for its decisions and actions, who can?

It is no wonder that the Supreme Court ends up taking suo motu action so often. If the parliament fails to be proactive, someone has to be! What surprised me further was the reason cited by the officials present as explained by a senior bureaucrat.

A currency usually takes a sharp beating when speculators bet against it and start purchasing, in Pakistan’s case, US Dollars. This leads to a reduction in the value of the Pak rupee. The State Bank can stabilise the market by selling US Dollars to the market basically maintaining equilibrium between the demand and supply of US Dollars. However, if such adverse news spreads, chaos may reign.

Any statements made by the governor of the SBP indicating his helplessness or despair may add fuel to the fire, causing the speculators to exploit this weakness exhibited by persistently betting against the Pak rupee. Hence, in such adverse circumstances, silence is considered to be the best response. The fact that there are people in the country who love to profit at the expense of the motherland was something I found truly astonishing.

The government, apparently, does not consider it appropriate to financially penalise those who bet against the country’s currency at a time when Pakistan’s foreign exchange reserves have decreased significantly. An International Monetary Fund (IMF) bailout had to be obtained in order to protect the exchange rate from further depreciating.

Perhaps, a harsher capital gains tax or some other regulations, in order to discourage people from indulging in speculation, are nowhere to be seen on the agenda of the government. It appears that the government’s economic ideology is more in line with the “Washington Consensus”, the policies of privatisation, deregulation and liberalisation, instead of impartially analysing the issues that are now plaguing Pakistan. Strong measures need to be taken to ensure such crises do not resurface in the future.

Adam Smith, a moral philosopher and pioneer of political economy, believed that the self-interest of the common man ultimately benefits the entire nation far more as compared to the actions of the person who voluntarily decides to promote other people’s interests. This theory of the invisible hand has failed to show its efficacy as far as Pakistan is concerned. It seems that the self-interest of an ordinary Pakistani is way too poisonous and beastly to be tamed by the invisible hand, especially the speculators in our midst.

How can we criticise our politicians of being insincere to the country when we ourselves are not faithful to our own Pak sar zameen?

It’s apparent that change originates from the heart of a common man and then spreads to the entire nation. Revolution starting from the lower strata of society is what the objective of this nation should be- not the redundant debate examining the pros and cons of toppling the government.

The Arabs have come to realise this fact after havoc wreaked their societies due to the Arab Spring of 2011. Look at how they have gotten back up, not to forget the funding even we receive from them.

Syed Hassan Raza

Syed Hassan Raza

A Research Associate at Senate who is assisting the Standing Committee on Finance, he is profoundly interested in exploring and researching Pakistan's economic and political issues.

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Baloch

    It doesn’t make any sense how these bureaucrats get away like this. How worse it could happen, such statements might cause speculation that Rupee is going to further depreciate which eventually cause it to depreciate.Recommend

  • IAbdussamad

    “A currency usually takes a sharp beating when speculators bet against it and start purchasing, in Pakistan’s case, US Dollars.”

    You are quoting Adam Smith and then this misguided sentence in the same article as well. You don’t understand economics. The rupee is falling because our inflation rate is higher than the American’s. Furthermore our forex reserves are critically low so the SBP can’t pump in dollars to prop up the rupee like it used to. In other words the chickens have come home to roost.

    The depreciation would have happened sooner had the SBP not wasted precious reserves defending the rupee. Last fiscal 70% of the reserves lost were spent propping up the rupee i.e. over $3 billion. Obviously this was not sustainable and now things are coming to a head.

    Blaming speculators is hilarious. It is fooling yourself of the true state of the country.Recommend

  • Sadia

    As far as I know demand for a currency derives depreciation/appreciation.

    Why would anybody demand Pakistani currency? We have no major trade, no industry, no investment opportunity due to situation of country. Hardly surprising what had happened to our currency then is it?Recommend

  • Danish

    Their staying lull in itself calls for speculators to assume further depreciationRecommend

  • Sillyboy

    Please read an economics book first before commenting on why the currency is depreciating. Its got nothing to do with speculation and a capital gains tax is laughable to control this even if this were true.Recommend

  • Hassan Raza

    Kindly read about George Soros, the man who broke the Bank of England. That will clarify to you the impact that a currency speculator can have on a particular currency. The East Asian Crisis in the late 90’s was an outcome of such currency speculation and of massive capital flight. However, as far as long-term direction of the currency is concerned, you are right. One must read an economics book to understand that.Recommend

  • faraz

    Speculation doesn’t lead to permanent depreciation. If real effective exchange rate is taken into account, Pak Rupee is at a point where it needs to beRecommend

  • sillyboy

    George Soros broke the bank of England? Really? he profited off it but really its a big stretch to declare he broke it. Please the East Asian crisis is popularly and wrongly diagnosed as currency speculation. While I am no expert the issue at the time was still structural weaknesses in the economies and the fast outflow of money (Hot money) vs. speculators destroying those economies.Capital flight is not necessarily speculative but generally symptomatic of deeper issues. In the wake of the crisis also the ASEAN economies came out stronger not weaker either as they also reformed structurally. The Pakistan issue is so much more basic, we have a low revenue base, high imports (driven by fuel and other essentials), low productivity (Low education, poor infrastructure and low female workforce participation) – generally why won’t our currency devalue? No one needs to buy anything from us.Recommend

  • khanji

    I am not an economist but why doesn’t fed increase rate significantly to curtail inflation? Are they afraid of KSE? Rupee will do fine if you give people incentive to save in Rupee. If your interest is negative or even 1% why would one save in Rupee? They should have increase rates 150 basis points today and give people a reason to get out of $ into Rupee IMO.Recommend

  • Syme

    Isn’t it in everyone’s interest. As far as my layman understanding is concerned, exporters will be happy as their product become competitive, imports will become costly. Local industry will flourish as a result. Expatriate will be extremely happy.
    Yup, dollarisation is much feared side effect however, once the value of rupee get stabilized; the local interest rates will discourage the capital smuggling and dollarisation. If government correctly appraise the local demand and ensure the supply of goods from international market then it is impossible to speculate. Interestingly, Pakistani government was also involved in speculations.The question, how can government ensure the availability and foreign reserves to buy the stuff is not a rocket science. You need to be more open with India as you are with Chinese useless ballpoints and mobile phones. The trend of breaking news should be discouraged.
    Government lack the will to control the black money and that is one of most important aspect. State Bank is incompetent to assert itself in the case of illegal currency trading and fiscal misappropriation; Parliament was rendered impotent in granting free trade agreement to China (Another “gift” of ugly dictatorship) and “babus” are inefficient in particular as it is their job to appraise the demand and supply ahead of shortage. Executive is always hiding behind doctrine of “national interest” and Parliamentarians are so gullible that they don’t ask them why babu sahib?Recommend

  • A. Salma

    Thank god for foreign remittances by hard working pakistanis abroad, This is the only denabd for pakistani rupees, keeping the fall of rupee in check.
    Other than this, practically no one needs rupees, we have nothing the world wantd, hardly a tourist is eager to come to pakistan. Our rich mining resources in balochistan (sandik) are sold to the friendly country china for 1cent on a dollar. sadRecommend

  • gp65

    This blog makes two points. One which I agree with and one I disagree with.

    1) I agree that government should be accountable to the legislature and answering questions in he legislature is one such forum for accountability. Ducking the question was thus a lack of accountability not appropriate for a democracy.

    2) the actual depreciation of rupee is driven by real market forces not speculation. Two specific things are a growing CAD that the government is finding difficulty in financing and the fact that inflation rate in Pakistan is higher than in US with interest rates in Pakistan not reflecting the higher inflation and risk premium of holding Pakistani currency. Both these issues have brought reserves to a critically low level. Recommend

  • Tooba

    What about the new agreement with the IMF? I thought thats devalued the rupee and according to the demands of the agreement, will be forced to be further devalued!Recommend

  • usman

    close to 4billion rupees daily they are out of their minds… they borrow to pay their bills their revenue is limited and whatever revenue they gain they spent that either paying the debt that they are already overburdened with or some stupid project … not even talking about the corruption over here that goes on with that spending and collection of revenueRecommend

  • Mustafa Alvi

    Anyone who has basic knowledge of even olevel economics can tell you how wrong you are. If anyone wants to help the currency is to simply help out the exporters and other producers catering to the domestic market, and start beefing up taxes on imports. Also inflation and the depriciation of money is directly linked to money supply. So the day the govt stops printing money to meet their own silly expenses i assure you that you will see a changeRecommend