Pakistan’s Prime Minister Imran Khan (extreme right) chairing a high-level meeting yesterday. (Photo: https://www.pmo.gov.pk)
I know nothing about how and why international currencies rise and fall against the dollar and how their values are determined and by whom. Who does?
This morning as I read about Pakistan’s new Prime Minister Imran Khan doing so quickly what he thought he might never do—reaching out to the International Monetary Fund (IMF) for a bailout—I got focused on one particular economic indicator. It is the value of the Pakistani rupee. The Pakistani rupee has fallen 20% since December, 2017, and is now trading at 128 per the US dollar on the open market.
Pakistan’s economy is said to be abut $313 billion and its population about 201 million. I cite these figures for a reason.
I have also been thinking about the Indian rupee and its falling value which is now a politically fraught issue in the country as it prepares for the 2019 parliamentary elections. The Indian rupee touched 75 against the dollar a couple of days ago and is now trading a little below that. India’s economy is said to be $2.6 trillion (as of 2017) and its population 1.35 billion.
With over eight times Pakistan’s economy and over six times its population the difference in the currency value is only about 50 rupees. This is the point where I betray my flaming ignorance about the complex science of currency evaluation. My attempt to cast the value of the two rupees in the framework of the size of two economies and populations may come across as laughable since they may have no correlation at all. However, as I grapple to understand how currency valuation is determined I think these points should play some role.
Why is that the world’s sixth largest economy, namely India, has its currency not very significantly stronger than one of the world’s lowest ranked economies, namely Pakistan? You might say that 50 rupees is a huge difference and you might be right but you have to remember that the two rupees are not convertible to each other. (When you think a little harder you will realize that the last point has no relevance to anything but it sounds rather educated.) In significant ways the value of a currency is decided by the country to which it belongs. That is why you often hear charges of currency manipulation, especially against China.
Currency valuation is a science that few really understand. I tried reading up a bit without really getting a handle on it. As you read on it gets so convoluted that “fuck it” seems to be the best way to explain it.
Coming back to the Khan government’s decision to open talks with the IMF for a bailout, Islamabad reportedly needs $8 billion to cover its external debt payments until the end of the year. Its foreign exchange reserves as of September are reported to be $8.4 billion. That means if it does not go for some immediate infusion of cash, it will run out of its reserves in order to make those debt payments or default. Islamabad can and has turned to its two main benefactors—Saudi Arabia for deferred oil payments and China for bridge loans—but that does not solve its long-term dilemmas.
Going to the IMF is always a difficult choice for countries because the institution is known to set tough reform conditions before releasing any money. We do not know yet what conditions the IMF might insist on to lend Pakistan $8 billion but one can say reasonably that they would be quite tough and not politically palatable for the nascent Khan government.
Although it may not be direct but there is a decisive Indian presence in the IMF as Pakistan opens talks with it. The IMF now has Gita Gopinath, a tenured economics professor at Harvard, as its incoming chief economist. She takes over by the end of this year and hence may not be involved in the talks with Pakistan but considering that only three months separate her from taking charge it is conceivable that she is watching this crucial bailout move. I do not know the IMF protocols over whether a new chief economist overlaps with the outgoing one—Maurice Obstfeld—as she moves in. It is fair to assume that there is some handover process which is already underway given the IMF’s extensive global involvement.
One can say with some certainty that Dr. Gopinath’s Indian origin will have no impact in the way the IMF would weigh Pakistan’s outreach but it is always interesting to speculate about.