Political Instability & Fall of Rupee

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Political Instability & Fall of Rupee
Political Instability & Fall of Rupee

Note: This article discusses political instability & fall of Rupee in context of Pakistan

Political instability is the propensity of a government collapse either because of conflicts or rampant competition between various political parties. Also, the occurrence of a government change increases the likelihood of subsequent changes. The economy of Pakistan has been badly damaged by political instability in the country. Politically, however, the interplay of religious fundamentalism, sectarianism, ethnic cleavages and regional economic disparities has made the country volatile and unstable. Various East Asian countries that were behind Pakistan in the 1960s have surged far ahead in most economic and social indicators. Pakistan has thus been unable to realize its potential. Much of the near-term economic instability has been driven by a global commodity price boom.

Pakistan’s new government is now finding itself in a precarious position. It was already on the defensive as it struggled to develop a plan to tackle soaring inflation and debt and as Imran Khan held massive anti-government rallies. The defeat in Punjab will diminish its public mandate and galvanize the opposition. The government risks losing additional support when it soon implements austerity measures to comply with International Monetary Fund requirements for a recently secured new loan. The next year could bring economic changes that benefit the current government, including a fall in global commodity prices and the easing of COVID-19 supply chain disruptions. If the global economy improves, the large Pakistani workforce in oil-producing Persian Gulf states would be able to send higher remittances back home.

This isn’t to say that Pakistan’s government won’t fold early. Large, sustained protests could prompt leaders to call early elections—especially if those leaders were under pressure from other state institutions. In addition, the governing coalition lacks unity. Policy challenges could tear it apart. It would also be more likely to step down early if it succeeded in ongoing efforts to secure legislative amendments that better protect its leaders from corruption charges. For now, expect the Sharif Administration to address Pakistan’s economic crisis by pursuing the new IMF loan. Sharif Administration is also seeking additional aid from key partners such as China and Saudi Arabia.

These measures don’t address the underlying causes of Pakistan’s economic stress. Namely, uncompetitive exports, debt-ridden public sector companies, and insufficient taxation. Although the government has signaled its willingness to address these problems. However government lacks the political capital—and the time—to do so. Instead, Sharif will likely hope, perhaps naively, that familiar Band-Aid policies bring some economic relief and political breathing room to better position his party for elections whenever they happen.

However, it is important to recognize that inflationary storm engulfing Pakistan is far more significant than in other peer economies. Much of this disparity has to do with a lack of forward-looking agricultural policies in Pakistan. Another reason is the dysfunctional markets in key commodities like wheat, where the government intervenes across the value chain.

Pakistan’s economy faces serious challenges due to fast decreasing foreign exchange reserves and political instability. Both domestic and international factors are contributing to the ongoing economic impasse. Foreign exchange reserves are decreasing by $300-400 million on weekly basis due to an increase in imports. FER may drop below $8 billion in the next couple of months. The drop is very alarming, if the current trend of imports continued.

The current situation requires political stability in the country to steer the economy out of the current morass. Political instability has also been contributing to the economic situation and no one is ready to invest in the country. The current economic situation requires all the stakeholders to sit together and take decisions to save the economy. State of the economy is not good with a rupee free-fall taking the country’s economy towards greater vulnerability.

The rupee closed in red against the dollar for the fifth consecutive day today. Market expects the rupee to remain under pressure until there is political stability and clarity about the government. According to Fitch Ratings, political volatility cannot be excluded and could undermine the authorities’ fiscal and external adjustment, as happened in early 2022 and 2018, particularly in the current environment of slowing growth and high inflation. Political frictions result in uncertainty among the business community, while investors worry about the possibility of new general elections.

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