If you wish to boil an ocean, do not ask for ways because there aren’t any. With the Federal Investigation Agency’s entry into the forex market, Pakistanis are soon likely to witness a market failure turning into a government failure.
The demand for US dollar, the reserve currency, always increases whenever a local currency faces volatility and there are scant opportunities for business and investment. When people with money lose trust in a market it is a gloomy scenario. Economies on the verge of default or hyperinflation tend to behave in this fashion. Argentina and Brazil have long wrestled with the problem.
Pakistan has seen the best of times and the worst of times. Today, it is probably best to describe the situation as bizarre. Nothing the government has done so far has eased the plight of the people.
The USD is currently in short supply in the open market. It is available in the black market at a higher rate. Why are people resorting to dollar hoarding?
First, people are buying dollars to conserve the value of their money. The inflation appears poised to touch the double digit. Hardly can a currency absorb such inflationary pressures without losing value. Interestingingly, the first probable cause of the ongoing inflationary trend is none other than devaluation. In November 2018, the State Bank pricked the bubble of our ‘over-valued currency’ hoping thereby to boost exports. The great expectations did not materialize. Many argue that our exports heavily rely on imported inputs. While our exports failed to budge in the wake of devaluation, we succeeded in importing inflation which is currently driving the commodities market.
Government inspectors may enter the open market without a legal basis or justification and make headlines. However, they will do this at the cost of leading it into a shadow economy. In today’s digital age of cryptocurrencies and block chain technologies, one should be cautious about deploying simple policing tactics to symptoms of complex economic issues
Second, a central bank having a hands-on exchange rate and interest rate, can easily lose precision in capital markets. This is also known as an impossible trinity (Economics 101). This factor too has contributed to aggravating the situation. The shortage of dollars in the open market can cause capital to take off or go underground. There is more to it than mere dollar hoarding.
Third, the market is rife with speculation, ensuing primarily from certain economic indicators. People in financial markets are known to be intelligent enough to broadly perdict the future course of events. The media, meanwhile, is reporting confusing statements by political leaders. Sometimes these reports are quoted out of context. Occasionally there is a sheer lack of responsibility. The speculation bubble is sucking in more and more of stable reserves as people expect smart gains over a short span.
Fourth, spending cuts introduced early to reduce the fiscal deficit, have slowed down economic activity. Finished stocks are piling up while wait and buyers are indecisive. Those in control of money are perplexed. Only a few years ago, real estate offered a good investment opportunity. This is no more the case.
So what options are left to the people having some savings at hand? Should they wait idly and watch their savings lose value or cause the government more head ache by buying dollars or move their assets abroad?
Ideally, none of this should happen. But the onus for acting responsibly is the heaviest on on the government. The central bank needs to be granted complete autonomy and robust accountability mechanism installed. It should immediately establish its credibility and transparency of its operations. In the short run, it should curb the seemingly abnormal incentive in dollar hoarding by categorically denying the rumors of devaluation. After all, urs is not an open float. So, there is no harm in issuing a policy statement to the effect that the USD will remain in the float band. To complement monetary initiatives, the government should also make fiscal adjustments on the expenditure side in order to create investment opportunities.
People with money cannot just sit and wait. Time is a great driver. Money makes its way. A government cannot control public behaviour if it is unable to provide choices. Latin American countries have tried it. They learned the lesson the hard way. We should take a leaf from their book. Government inspectors can enter the open market without a legal basis and make headlines, but they do so at the cost of leading the trade into shadow economy. In this age of cryptocurrencies and block chain technologies, one should be cautious while deploying simple policing tactics to deal with symptoms of complex economic issues.
The writer is a public policy scholar at Lee Kuan Yew School of Public Policy, Singapore