Einstein once defined insanity as doing something over and over again and yet expecting different results. I was reminded of this as I watched the drama around the high flying dollar unfold in a plethora of ‘policy actions.’ Immediate ‘crackdown’ was announced against dollar hoarders and a panicked (plus confused) finance minister asked Pakistanis to invest in stock market rather than running after the currency. An official ‘policy’ was announced according to which dollars would only be supplied to people for education, medical and religious travel purposes.
Now these all perfectly fit Einstein’s definition of insanity because these methods have been tried many times before with the same result: failure. Let us try to decipher this perennial problem, in order to understand why the Pakistani government response in such times is nothing but dumb.
The first official claim to debunk is the supposed attainment of equilibrium between value of the dollar and rupee. If there were equilibrium, why did the government panic and resort to crackdowns and limiting dollar supply? As per the president of currency dealers association, the demand for dollars is seven to eight million units per day, while the supply is hardly four to five million. You don’t need to be an economic wizard to realise that there is a wide gap between the supply and demand and there is no possibility of an equilibrium. In such situations, what equates supply and demand is the price movement. Dollar’s value rose so as to move towards its natural equilibrium, a process which is extremely difficult (if not impossible) to stop. One lesson that policymakers can learn from history is that no matter what, a commodity will find its equating value one way or the other, in the open market or in the informal/black market. Unfortunately, this lesson seems lost upon policymakers in Pakistan.
If policies to halt the rise on the dollar’s value against the rupee are futile, why do governments resort to them repeatedly? The answer is disarmingly simple: politics and PR
Please note here that in trying to dissuade people from hoarding dollars, the government is itself resorting to hoarding through limiting its supply since it desperately needs dollars. Talk about contradiction in actions.
Let us now turn to the policy of initiating crackdowns on hoarders. Hundreds of such crackdowns have taken place before, with the end result that all of them proved to be futile. One reason for this failure, of a commodity price reaching equilibrium one way or the other, was mentioned above. Additionally, hoarders or speculators are only a non-significant, marginal presence in the overall supply of the dollar, therefore they cannot affect the prices or the supply significantly. How much currency, for example, was retrieved from hoarders this time around? And third, they tend to be so well connected that news of a crackdown reaches them even before it begins, by which time ‘safety measures’ are in place. Again, no policymaker in Pakistan seems to have learned this lesson.
The size of the black/informal market expands as soon as attempts to limit the supply of the dollar begins. If a much wanted commodity is restricted from being traded openly, it will ultimately find its way to the informal market, where it would sell at an even higher rate than the market price due to the additional premium on its availability despite official restrictions. Again, no lessons learned.
If policies to halt the rise on the dollar’s value against the rupee are futile, why do governments resort to them repeatedly? The answer is disarmingly simple: politics and PR. Just imagine how would a government will look if the prime minister or the finance minister were to tell people that let the market forces decide the value? The repercussions, in terms of popularity, would be severe. Hence, it is always politically feasible to take recourse to ideas that don’t deliver at all.
It was also hilarious to hear Asad Umar advising Pakistanis to invest in the stock market rather than dollars. Already well on his way to becoming Pakistan’s worst finance minister, it was not pretty to see him so confused and off-course in tackling this issue. If he had any grip on economic management and its ground realities in Pakistan, he would never have said that.
I have dealt with the stock market issue in a previous column, and brought to fore its rigged nature due to sway of a few brokerage houses, an avenue where hardly a percent of Pakistanis invest. Perhaps more importantly, the variations in price movements are so large that it is not an attractive investment avenue at all. Compare that to the dollar, a currency whose country of origin has the world’s biggest economy and backing of its institutions and leadership. Importantly, the variation in its value against other assets is very small, meaning there is a certain degree of assurity and certainty about it, and that it is also a good bet against inflation. Why would anybody invest in an unsecure, uncertain stock market when a formidable and attractive alternative like dollar is available? And why can’t Pakistan’s finance minister understand this simple thing?
Now onto the real question: what underpins the persistent rise of dollar against the rupee? Both the dollar and the rupee, besides being currencies, are also assets backed by their respective governments. In technical lingo, they are ‘legal tender’, backed by a government guarantee. That is how they derive their value, otherwise they are merely pieces of paper. It follows then that a government’s and a country’s own economic health and overall situation would have a direct bearing upon the values of their currencies.
Well, just put America and Pakistan in front of you. The former is the undisputed leader of the economic order with the largest economy. Its institutions, especially those that deal with economic management, are independent and powerful to the extent that even the US president cannot direct them to tow a certain line. In case of uncertainty, its institutions like the Federal Reserve spring into action without the need for anybody to interfere. Believe it or not, this institution single-handedly saved the world economy from complete meltdown in 2008. It is these kinds of features that make the dollar the most sought after and liquid asset in the world. The wheels of world trade are oiled by this currency.
Contrast this to Pakistan. It constantly finds itself in economic trouble, usually short of policies to aspire confidence in the economy and rupee. Its institutions are corrupt, incompetent and non-transparent. At present, it has a finance minister who is all at sea in terms of economic management. True, that dispensations before them were also disasters, but since they took power, they’ve ushered in three mini budgets and nothing but big-talk about turnaround. And it does not help much when the PM of a country continuously moans about empty treasury, widespread corruption and banks upon illusory tales like $200 billion stashed abroad. The world watches anxiously as the PM of a nuclear power hops endlessly between Beijing and Arab capitals to garner emergency life support, without which Pakistan’s economy will collapse.
So, how exactly does anyone expect the rupee to hold against the dollar in this situation, when there is no confidence in the country and its workings, borrowed funds cannot save the day for you and can only delay the inevitable?
Our economic managers are the perfect match for Einstein’s definition of insanity, indulging in trivial actions. For God’s sake, bring something serious to the table to improve this country.
The writer is an economist