It is interesting to note how history repeats itself in case of PKR / USD exchange rate dynamics in Pakistan. Politicians, economists and finance ministers in a few countries, including Pakistan and Turkey, still believe that by using the “talk down” tool, they can reduce volatility and / or bring the exchange rate down. desired level.

After the official euphoria over the conclusion of the agreement with the IMF (International Monetary Fund) and the Saudi petrodollars landing in our begging bowl every day, faded and failed to bring down the PKR / USD at 167-170 within hours / days, the relevant advisor on Finance and Revenue released another “talk down” tool to bring down the PKR / USD rate.

This tool is not new and has already been used by Pakistan’s finance ministers with little success. Unfortunately, living under the shadow of the “Washington Consensus” is very difficult as the following journey through the time tunnel reveals.

At the operational and theoretical levels, this also raises the following set of questions: does the “talk down” facilitate the bringing of the exchange rate to a desired level and with what delay? Is this a precursor for administrative and political actions to actively influence market sentiment? Has the effect of the “talk down” on the management of exchange rate volatility been isolated empirically from other macro / micro fundamental indicators? In the end, is this a political gimmick or does it really influence and for how long over a day, a week or a month the feelings / speculations of the market for a given volatility episode? Should the finance ministry even “talk” about exchange rate fluctuations when it comes to the SBP (State Bank of Pakistan) domain?

Shortly after the PML-N came to power in May 2013, the government warned in December 2013 that “those who bet on the dollar should ‘cash them in’ with the exchange rate expected to drop soon,” according to one. large English language newspaper. . What a coincidence! The “downward conversation” emerged when the average monthly PKR / USD exchange rate depreciated from 98 in June 2013 to 107.51 in November 2013. According to the article, it was reiterated that the government was was trying to bring the exchange rate back to the 1998 level. levels (= PKR.46). Fortunately, thanks to external factors, upon entering into a new deal with the IMF and / or selling USD in the market, the PKR / USD gradually fell from 106.94 in December 2013 to 98.59 in May 14 before exceeding the PKR 98 in August. ’14. Bringing him back to PKR 46, however, was still a pipe dream. With a simultaneous play of the factors mentioned above, to bring it down in the space of 4 months was only due to the “talk down” remains an empirical exercise. The PML-N government managed to keep the exchange rate fixed around 100-105 until 2017 at the cost of stagnant exports. The criticisms of many gurus of the quasi-free float of PKR linked to the autonomy of SBP are also based on the failure of the “talk down” tool in dealing with the rigidity of the exchange rate.

Credit goes to the current Advisor / Minister of Finance for using the RRSP (albeit a month or two late) as a benchmark to announce PKR’s undervaluation and for not making heroic statements like some of his predecessors to gain political momentum.

The determination of the exchange rate in developing countries with weak fiscal sustainability and BoP (balance of payments) is vulnerable to many shocks, including economic, political and regional / global. Statistically speaking, its movement is reduced to a “random walk” in the short and medium term.

It must also be admitted that the factors determining the current dynamics of exchange rates are not exactly comparable and even more complex than in 2013. the following reasons: a) the knowledge (level) and determinants of the REER, including Rational expectations of inflation rate differentials between trading partners are now more prevalent. Thus, the current value of the RRSP index of around 94 does not in any way affect the rigidity of the exchange rate; b) our external debt profile, including short and medium term payment obligations, is now more vulnerable than it was in 2013. So the good news regarding expected reserves and the transfer of a greater debt to future generations does not remove the rigidity of our exchange rate; c) the strength of the USD against other currencies via expected capital flows to the United States and uncertainty over the Fed’s timing for the reduction of the policy rate cycle further aggravate the PKR / USD exchange rate conundrum; d) at the regional level, how the shortage of USD liquidity in Afghanistan will be handled by multilaterals and the dynamics of the common currency area by Pakistan also add another layer to the rigidity of PKR / USD movements; e) to what extent the continued increase in remittance flows as well as investments in start-ups put the dollar under the pillow of expatriate families and new start-ups (service sector), and How much is drained due to inflation remains a matter of empirical research. While this is a net gain, it adds to the USD holding capacity of households and businesses, and may not be sensitive to “chatter”.

The retention power can be measured by a flexible growth indicator of the FCA (Foreign currency account) since July 21 compared to previous periods; and f) with textile exports driving overall exports into double digits, partly due to various fiscal and monetary excesses, exporters ‘USD holding capacity is at an all time high and they can wait for the companies’ forecasts to be met. rating of PKR 180 by the end of 2021. Many may have replaced cash from stock sales or existing bank deposits to cope with rising input costs and take full advantage of the time frame for delay the return of foreign currency receipts through banks.

By combining the historical evidence with the above complex set of factors determining the stiffness of the PKR / USD in moving rapidly towards the range of PKR 167-170, the “talk down” tool may not serve its purpose in this quasi-casino economy where quick real profits (thanks to negative interest rates) can be made in real time by quickly moving unreported income and profits to many alternative channels of wealth creation.

Copyright Business Recorder, 2021