THERE is an enduring consensus in Pakistan that the exchange rate should not be allowed to move by much as a matter of routine, and that determining its level is a matter of discretion for the state.
asserted
determining → be → state
In some areas we call this “Dar-o-nomics”, after Ishaq Dar, whose name came to be attached to exchange rate policy not because he invented it, but because he has been its most important and visible advocate.
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he → call → it
Otherwise this thinking dates back to Ghulam Ishaq Khan, who was of the mind that the state should liberalise the economy in such a way that it does not lose its commanding position as the arbiter of all economic outcomes.
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it → date → outcomes
From deciding the exchange rate, to deciding who gets to make how much profit and what should be the normal indexed rate of return on private capital in the economy, GIK wanted a model of liberalisation that kept all these decisions firmly in the hands of the government.
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that → decide → government
Nowhere is this thinking more clearly stated, and perhaps to more devastating effect, than around how it treats the question of the exchange rate.
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it → state → rate
Over the years many have given voice to this thinking in different ways, and their arguments cluster around three basic assertions.
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arguments → give → assertions
One, devaluations lead to a hike in the rupee-denominated debt service burden.
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devaluations → lead → burden
Two, devaluations do nothing to boost exports, they only provide a short-lived impetus that is quickly frittered away as costs of imported inputs rise accordingly, and exporters are forced to pass the price benefit on to their buyers.
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exporters → do → buyers
Three, devaluation causes inflation that burdens the poor disproportionately.
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that → cause → poor
What is wrong, however, is deploying them in defence of a fixed exchange rate.
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is → deploy → rate
What all those who have used these assertions over the years have failed to do is actually study Pakistan’s own episodes of exchange rate devaluation.
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failed → use → devaluation
Were they to do that, they would realise that devaluations in our own history have nothing to do with restoring export competitiveness or anything quite so grand.
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devaluations → do → competitiveness
In truth, devaluations are forced upon us because the supply of dollars relative to the supply of rupees in the economy shrinks to a point where a mass stampede breaks out with everyone rushing for the exits.
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everyone → force → exits
Devaluations have to be undertaken to reflect the new reality of supply and demand of FX liquidity, and to halt the stampede.
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Devaluations → have → stampede
That’s all.
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That → ’ → ?
To all those who want to talk about the exchange rate, I ask them to study three episodes from Pakistan’s own history when devaluations happened.
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devaluations → want → history
The first was in 2007 and ran till late 2008.
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first → run → 2008
The second began in late 2017 and ran till 2019.
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second → begin → 2019
The third episode began in the middle of 2021 and ran till the middle of 2023.
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episode → begin → 2023
These three cycles teach us everything we need to know about exchange rate management.
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we → teach → management
Devaluations in our own history have nothing to do with restoring export competitiveness or anything quite so grand.
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Devaluations → have → competitiveness
Each episode happened when Pakistan’s foreign exchange reserves were depleting fast in the face of skyrocketing import and debt service bills.
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reserves → happen → bills
In each episode the government chose to first hold the ground and finance the outflows using borrowed money.
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government → choose → money
In each episode they hit a point where further financing was insufficient to meet the pace of the reserve erosion.
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financing → hit → erosion
And in each episode the government hit a point where they had no choice but to reprice the dollar to reflect the new reality of its supply versus demand.
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they → hit → demand
In short, in each episode the government chose to drive blindly towards a cliff.
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government → choose → cliff
So the question to ask is what they were telling themselves along the way.
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they → ask → way
Reserves peak, the government of the day boasts about having built “record high reserves”, and then the trade deficit begins to swell.
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deficit → peak → reserves
For a few months remittances cover the trade deficit so there is no urgency to act.
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remittances → cover → deficit
Then the current account swings into deficit and remains there, and then the deficits begin to grow.
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deficits → swing → deficit
The government borrows to replenish the reserves.
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government → borrow → reserves
The borrowing hits a limit, the current account deficit marches along, and reserve depletion accelerates.
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depletion → hit → limit
What are they telling themselves during these times, when the pressure is mounting but has not yet reached catastrophic proportions?
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pressure → tell → proportions
It has been my unpleasant duty to have covered all three of these cycles over the past two decades, and I can confirm that in each episode they tell themselves the same thing.
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they → cover → thing
First, that the current account deficits are temporary, or driven by one-off factors.
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deficits → drive → factors
When the reserve erosion begins to trigger a flight into the dollars, they argue that administrative measures are required to stem the outflows and bring stability back.
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measures → begin → stability
When they are advised to reprice the dollar before things get out of hand, they respond that exchange rate adjustments do nothing to increase exports, while they produce harm for the country in the form of higher debt service bills and inflation.
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they → advise → bills
Eventually they all succumb.
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they → succumb → ?
They succumb for the simple reason that you cannot endlessly spend money that is not yours to spend.
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that → succumb → money
And when they succumb, they grumble and complain.
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they → succumb → ?
…and 6 more, not listed.
The Aporia
