“Only 100 days since the new government had been sworn in, and the economy had gone into a free fall.” Primarily, the tale of doom was woven around the Rupee. Sensationalist rhetoric took over all sense, trumping any economic logic.

The rise or fall of the Rupee - or any other currency for that matter - is not subject to the whims and wishes of the policymakers, or even the Central Bank. It’s constrained by a variety of factors. As it happens on our planet, anything may be under- or over-valued in the short run, but it may be argued that in the long run, everything - every commodity, every idea, every person, converges to their ‘true’ value. This applies even to the murky world of currencies. The Rupee had to adjust to its true value ultimately and it did. It did not ‘fall’ - it was allowed to adjust, something that should have happened way earlier.

For some time now, the Rupee had been grossly overvalued. In July 14, 2007 Article IV consultation, the International Monetary Fund (IMF) pointed out the overvaluation to be around 10 to 20% with respect to the Real Effective Exchange Rate and iterated its stance in the Staff Report of March 2018. Many independent economists also kept ringing alarm bells. But the outgoing government did not want to pursue the highly unpopular policy of devaluation with the elections around the corner. And some experts backed the government’s stance on somewhat questionable grounds. They pointed out that the Rupee will result in a rise in dollar-denominated debt and increase the cost of imports which have become even more important since the China-Pakistan Economic Corridor has kicked off. Resultantly, Rupee was not allowed to take on its actual value.

The Rupee was kept ‘strong’ as the economy kept weakening. But is the strong Rupee – come what may – such a good thing? Not really.

China is one country which keeps an undervalued (weaker?) currency. Instead of fretting about a ‘weak’ currency, they revel in being the leading exporters in the world. The undervalued yuan helps this. A person in, say, the United States, will be able to buy double the amount of any product, say Chinese apples, if $1 equals 6 yuans instead of 3. This will shift the demand for apples from other countries to China.

What was happening in Pakistan was an inverted image of the above picture. It is easy to see why an overvalued Rupee meant lesser exports and more imports. A ‘stronger’ rupee meant imports appeared cheaper to Pakistanis. This imports over exports imbalance caused a run on the foreign reserves in the country. Imports were using up the foreign currency reserves and there weren’t as much exports to finance them. This sent the reserves into a free fall.

When the reserves dried up, the Central Bank lost its primary tool to keep the Rupee afloat – selling foreign currency in the currency market. The State Bank could have bought Rupees in the currency market, using forex reserves, causing the Rupee to (nominally) appreciate. This is simply the result of the (artificial) increase in demand for Rupee. It’s basic economic logic that anything that is in-demand fetches a higher price, and the same is true for the Rupee.

But with the reserves dwindling, the State Bank loses lost this option as well.

Falling exports, rising imports, no foreign investment, and no reserves. This was the backdrop against which devaluation came, which in turn is the result of a long, nasty history of structural bottlenecks in the economy, power and energy crises, undiversified industrial and exports base, misuse of central bank, and what not.

Finally, the criticism of (effective) revaluation of the Rupee on the grounds of rise in debt and the price of imports is correct per se, but completely ignores the fact that the rate of Rupee, or any currency for that matter, is not determined in isolation, on an island, but is subject to myriads of other factors in the national and international markets.

In short, the Rupee did not ‘fall’ overnight. It had to be devalued based on the economic circumstances over the past 2 years or so. And the government deserves credit for letting the State Bank work with complete autonomy. The Rupee’s ‘weakening’, if coupled with the right policies for gaining investor confidence, will strengthen the economy. The government is yet to prove the latter.


The writer is a Lecturer at SZABIST, Islamabad and a PhD Candidate at Ibn Haldun University, Istanbul.