A thread on the four main reasons for the recent precipitous decline in the value of the rupee.
A: Uncertainty about renewal of the IMF programme.
B: Largest trade deficit and fastest growing imports in history.
C: Fourth highest inflation rates among major countries. 1/10
A: Uncertainty about renewal of the IMF programme.
B: Largest trade deficit and fastest growing imports in history.
C: Fourth highest inflation rates among major countries. 1/10
D: Rapid increase in money supply. I will expand a little on each of these reasons below: 2/10
A: Uncertainty about renewal of the IMF programme: Our programme was “revived” earlier this year and we were supposed to get a $1 bil trance in July. We are now in November and still there isn’t an agreement. This is giving markets jitters. 3/10
B: Largest trade deficit and fastest growing imports in history. We are on track for imports of $75 bil or over 24% of GDP. Both these are the highest in history. This year exports will cover only 37% of imports, down from 44% in 2018. We are moving in the wrong direction. 4/10
Our trade deficit in on track to be $47 bil or 15% of GDP. Again both numbers highest in history. Current account deficit will be around 5% of GDP. But for the healthy remittance due to decreased travel etc, we would have recorded the second highest current account deficit 5/10
in our history, after the one of 8.1% in 2007/8, the last year of Gen Musharraf. The increased net demand of dollars from foreign trade is thus putting pressure on the Pak rupee. Until we slow down imports or increase exports, the rupee will continue to be under pressure. 6/10
C: Fourth highest inflation rates among major countries. A recent issue of the Economist showed that Pak has the fourth highest inflation among major counties, two of whom we don’t even have much trade with. We also have the highest inflation in South Asia. 7/10
Given that our inflation is more than our trading partners, our exports goods become more expensive and import goods become cheaper. This increases our real effective exchange rate and puts pressure on the rupee. 8/10
D: Rapid increase in money supply. Our money supply has grown from Rs 4.7 tril to Rs 7 tril, an increase of 49%. Dr Hafeez Pasha estimates that a 1% increase in money forces a 0.6% rise in inflation. Primary cause of money supply increase is record high govt budget deficits. 9/10
There are other reasons for the continuous devaluation, political uncertainty for one, but these four —-interlinked as they are— I think are the major reasons. 10/10 //
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