The current balance of payments crisis in Pakistan evoked my memories of visiting Argentina as a Chase Manhattan derivatives banker in the 1990’s. Domingo Cavallo’s artificial peso peg against the US dollar led to a currency collapse, banking failures and political chaos (five Presidents in a single year!). The analogy with the abandonment of Pakistan’s rupee peg in early 2018 is unmistakable. The scale of monetary mismanagement in Pakistan ensures a systemic external debt meltdown in 2019. Why?
Pakistan’s PMLN Prime Minister Nawaz Sharif maintained an inflated rupee peg against the dollar in 2013-17, enabling my tribe of offshore investors to enjoy 25% plus US dollar returns in the stock exchange for three successive years, among the highest in the world. Pakistan spent $7 billion in Central Bank intervention to keep the rupee inflated against the US dollar in order to facilitate the elite’s capital flight and fondness for subsidized luxury imports. Yet I slashed my Pakistani equities exposure to zero the moment Pakistani’s Supreme Court, inspired by the Rawalpindi GHQ’s Praetorian cabal, dismissed Nawaz Sharif for his alleged weakness for Mayfair luxury flats (Bad strategy call on Curzon and Duke Street, as Brexit proved). From my experience in Argentina, I knew the new government, whoever it was, would be forced to succumb to a free float FX regime with a draconian rupee devaluation and an IMF bailout. This meant a bloodbath on the Karachi stock exchange.