Finance: Massive reforms needed

The State Bank of Pakistan’s (SBP) decision to reintroduce market-driven exchange rates from Jan 26 has started paying off dividends. After experiencing a massive, quick depreciation of 19.8 per cent value against the US dollar between Jan 26 and Feb 3, the rupee recovered 2.6pc of its lost value during the week ended on Feb 10. On that day it closed in the interbank market at Rs269.28 to a greenback, up from Rs276.57 on Feb 3 but still far lower than Rs230.89 as of Jan 25 — its last trading day under a range-bound managed exchange rate regime. The recent gains in the rupee are primarily owing to the selling of dollars by currency hoarders and some effective checks on the massive smuggling of the greenback to Afghanistan. This temporary rupee appreciation is a healthy development as it will provide much-needed support to sagging exports and will also lessen, to some extent, the rupee cost of external debt repayments. But Pakistan’s forex crisis is so deep that it may take years to achieve stability in the external sector. The central bank’s forex reserves of $2.917 billion (as of Feb 3) provide import cover of fewer than three weeks against the standard minimum of three months. Even total forex reserves of $8.54bn (including SBP’s and commercial banks’ reserves) can barely meet the regular import bill of one and a half months.