The country’s economy in general and importers in particular have been negatively impacted by increased L/C restrictions and exchange rate controls on the interbank market. The PKR lost 9.6 percent of its value against the USD yesterday, which was the most in a single day in more than 20 years. Pakistan’s rupee has lost 12.1% of its value versus the greenback during the past two sessions (Thursday and Friday).
On a larger scale, all of the economic issues the country has faced in recent years may be traced back to a fixation with upholding arbitrary prices. The Dar peg would undoubtedly be among the worst economic mistakes in the history of economic decisions made by Pakistani policymakers, considering the severe economic repercussions that it entails. The effects, which are already starting to show, will severely reduce the spending power of all demographic groups.
The thinking behind bringing back Ishaq Dar was the obsession with a fixed exchange rate as the so-called financial wizard promised to make the Pakistani rupee appreciate by more than 15% against the US dollar at a time when the country’s foreign exchange reserves were depleting, and it was barely possible to import even the most basic necessities. Such a tactic would have worked a few years ago when Dar borrowed dollars when interest rates in developed economies were near to zero, but this dynamic was altered by a global monetary contraction.
However, policy makers continued to work from a position of ignorance and remained oblivious to what was happening in the rest of the world, bringing the country to the brink and destroying the savings and purchasing power of the great majority of the population. This was an unprecedented act of economic sabotage. The central bank began pumping money into the market in order to facilitate the rupee’s appreciation against the US dollar, thus depleting valuable reserves.
The policy of an arbitrarily fixed exchange rate that lasted for more than a few months created an enormous gap between the dollar actual value and interbank value. As a result, remittance flows were forced to divert to unofficial channels due to the enormous difference between interbank and open market rates, which further reduced foreign currency inflows and contributed to additional liquidity issues.
Fuel prices will be the first to factor in the impact as the economy readjusts to a new equilibrium exchange rate, followed by other imported items, further driving up inflation.
Inflation is expected to reach more than 30 percent over the following few months due to the impending inflationary spiral, which may peak around the time of the planned general elections. Making decisions without any data or knowledge of global macro patterns should always result in tragedy, as it has in this instance.
