TC September-October 2021 Issue

TRADE CHRONICLE
Looking at rupee’s fall with
the new normal lens
By Mohiuddin Aazim
The State Bank of Pakistan has
recently taken multiple measures —
ranging from the imposition of cash
margins on hundreds of import items
to requiring the purchase of dollars to
biometric verification of buyers — all
aimed at avoiding a further fall of the
rupee.
The rupee has lost about 8.5 per cent
of its value against the US dollar since
the beginning of this fiscal year on July
1. (It sank to 170.96 a dollar on Oct 6
from 157.54 on June 30).
The central bank is desperately trying
to stabilise the exchange rate. But
unlike in the past, it is not intervening
in the currency market in a big way
for two reasons. First, learning from
past mistakes the central bank has
decided in principle to let market forces
determine the exchange rates. And
second, its forex reserves that cover
the merchandise import bill of just over
three months are not strong enough
to do this, particularly at a time when
regional peace remains clouded after
the Taliban takeover of Kabul in mid-
August.
These are tough times for those who
hate to change. The pandemic has
given birth to the new normal. We must
change the way we used to think and
act.
The fall of the rupee — a 100pc
increase in the trade deficit (between
July-September) behind it — is not new
to Pakistan. But this time around the
traditional quick fix cannot work. Why?
The post-pandemic global economy
has changed. And, the scope of the
new normal is expanding. There is little
room for applying quick-fix solutions to
structural problems.
Remember what Pakistan did back in
2018-19 when the rupee lost about
32pc value against the US dollar?
It borrowed funds extensively from
‘brotherly’ and ‘friendly countries’. That
was the old way of doing things.
This option is not available now. Why?
Those nations (ie Saudi Arabia, UAE
and China) and even other countries
such as the US and UK that we could
have looked up to for seeking forex
funds have tightened controls over
forex spending. (The US withdrawal
from Afghanistan which many see as
hasty came about when Washington
realised it cannot afford to fund a neverending
war).
And, Beijing is now examining more
closely than before the release of its Belt
and Road Initiative funds, according to
reports in the Chinese and international
media. Saudi Arabia and the UAE are
focused on maintaining— or even
enhancing — the import coverage ratio
of forex reserves to cope with ongoing
uncertainties of the pandemic.
The rupee has fallen in recent months
despite the fact that Pakistan, just like
other countries, received its due share
of forex support from the International
Monetary Fund to fight the pandemic;
the country also received enough
amount of free vaccines from the
World Health Organisation and friendly
nations and part of its foreign debt has
been rescheduled.
This is the new normal. Richer nations
individually, as part of the global
collective as well as international
institutions, are realising their
responsibility to help economically poor
countries steer out of the pandemicrelated
forex crises. But there is another
new normal.
Scientifically advanced nations that led
vaccine development programmes and
initially shared those vaccines free of
cost to other nations are now making
billions of dollars in increased exports
of vaccines and pharmaceutical and
health care products. Export demand
for this category is sure to remain
strong in the foreseeable future.
And, countries that are not prepared
to exploit this potential demand would
remain a net importer of vaccines
and pharma and healthcare products.
Pakistan is one of them, though it is now
trying to expand the base of its pharma
industry and boost pharma exports.
Similarly, the country has only recently
started exporting cellphones made in
Pakistan with foreign collaboration to
reduce net imports of smartphones
that consume over a billion dollars a
year. Meanwhile, the SBP has made
bank financing of imported automobiles
more difficult — to reduce the overall
merchandise import bill and cut the
trade deficit.
The new normal of external account
management is this: do what is required
to become a net exporter of something
big — and do it quickly. Or remain
dependent on imports — and let the
trade deficit rise and local currency fall.
The global container freight rates
index has more than tripled in the past
nine months. The index rose from
$3,143 in December 2020 to $10,323
in September 2021 mainly due to the
pandemic-related interruptions and
a surge in global trade as economies
started to recover from the 2020
recession. This has led to a sharper
increase in the cost of exports and
imports of countries like Pakistan
whose local shipping industry is least
developed.
This phenomenon is the new normal
in international trade. But developing
the local shipping industry in the short
term is not possible as it requires huge
funds, vast expertise and a long time.
It means Pakistan’s services import bill
will continue to rise, putting pressure on
the overall (merchandise and services)
trade deficit.
That brings up another critical issue.
That is, Pakistan’s historical inability to
increase its trade with neighbours. Out
of our four neighbours (Afghanistan,
Iran, China and India), we have enjoyed
consistently friendly relations only with
China. With Afghanistan and Iran, our
trade relations have remained erratic
both due to our bilateral issues as well
as the sanctions imposed on Iran by the
West. As for India, the lesser said the
better.
Trading liberally with immediate
neighbours would eventually become
another new normal pretty soon,
strengthening further growing intraregional
trade. But when exactly South
Asian nations will learn to resolve their
conflicts amicably and embrace this
new normal cannot be predicted.
Courtesy - DAWAN
TRADE CHRONICLE - Sep - Oct - 2021 - Page # 8