RUPEE WEAKENING AGAINST DOLLAR
SHAMIM AHMED RIZVI
Sep 1 - 7, 2008
The unprecedented devaluation of rupee during the last couple of weeks has triggered a new wave of inflation as imports are costing more and cost of doing business are increased besides magnifying the burden of foreign debts and their repayment. According to experts importers and ultimately the consumers will have to bear extra burden of Rs 400 to 450 billion if dollar-rupee parity stays at present level of Rs 76 to 77 a dollar in the current financial year. External debt burden is also rising by weakening rupee parity. In rupee term the external debt burden has already increased since April last by about Rs 4 billion when one US dollar cost Rs 63.
Apparently free fall of rupee has perturbed everybody except the government and its economic managers. Surprisingly there is a complete silence from the regulators side as unprecedented depreciation of rupee against the dollar is not concerned and neither the central bank nor the finance ministry has bothered to look into the developing scenario of grim effects on country's economy.
The currency dealer and the capital market analysts were surprised over the quick devaluation of rupee in the inter-bank and the open market operations amid reports of a substantial increase in the inflow of remittances in the month of July. Last month the over seas Pakistanis sent home 627 million dollars worth remittances which are higher by 131.53 million dollars against the inflow of 495.69 million dollars in the same month last year, but the increased inflow of remittances could not arrest devaluation of rupee. Details obtained by page showed that in last two and half months the US currency had edged up by about 14 rupees against Pak-rupee and settled above 77 rupees in the open market as against the exchange rate of slightly below 63.
Experts said that as the announcement of impeachment of President Pervez Musharraf by the coalition government had deepened the political-chaos in the country, the market forces had renewed their struggle to take benefit of this opportunity and they had successfully manipulated the value of rupee against the dollar, a phenomenon that could prove another blow to the economy, foreign investors and the consumers in Pakistan. Another worth mentioning development is that the international oil prices, commodity prices and dollar's value against the Euro and other currencies are on the decline, but in Pakistan the US currency was gaining consistently against the rupee mainly because of the artificial manipulation by handful market players. According to analysts the imports would become expensive over 21 per cent in this fiscal as the dollar-rupee exchange rates had jumped to 77 last week against 62 exchange rates that prevailed most of the time in last financial year.
Consumers would have to face more inflationary pressure in this fiscal amid declining value of the Pak currency because the difference of devaluation would be passed on to the consumers by the importers. That how much financial burden the importers and the consumers would have to face in the wake of depreciation of the rupee can be imagined from the fact that in 2008-09 the importers and consumers would have to pay over and above 400 billion rupees incase the dollar-rupee exchange rate stays around 77. However, the quantum of financial burden would further surge in case the rupee sheds more value against the dollars in the days ahead as the market forces are operating with a free hand to manipulate the exchange rate these days.
In 2007-08 the import bill of Pakistan amounted to 40 billion US dollars (Rs2.512 trillion). If the import bill pegs to the same level in 2008-09, the difference of existing open market dollar-rupee exchange rate would lead to the extra payment of 450 billion rupees when compared with the last fiscal year's exchange rate of 62 rupees. This financial burden would aggravate further if the dollar-rupee parity edged up beyond 76 / 77 rupees. Although the federal government wanted to squeeze imports by 6 per cent in the current financial year, the imports, however, exhibited a massive growth of 38 per cent in the month of July 2008, the first month of the new fiscal year. It shows that if the government did not take drastic measures, the imports would grow with more vigour and strength in the ongoing fiscal year.
Meanwhile, over one million Pakistanis who go abroad every year would also have to bear the extra financial burden of tens of million of rupees due to devaluation of rupee. Source in airlines industry said that every year 1.4 million Pakistanis visit different countries as tourists. Amazingly, so far only the Pakistan Forex Association had made an appeal to the federal government to set up a body to monitor and control the depreciation of rupee, while the government quarters are totally locked in the ongoing and intensified political tug of war between the coalition partners and President Pervez Musharraf.
There are reports that demand for dollars has increased tremendously in Pakistani market because of uncertain conditions. The extra cautious moneyed class is buying dollars in bulk and sending it to Dubai through illegal means. According to an estimate about 5 billion US dollars are going out of the country every month. This is said to be the main reason for abrupt rise in the value of dollar against Pakistani rupee. Both bankers and dealers said the stability of exchange rate can come only with the building of foreign exchange reserves of the country which fell to $ 9.6 billion. They said that the reserves of over $16 billion proved effective giving sound backing to the local currency against the dollar and all other major currencies. Rupee has been losing against all major international currencies which the economists said was reflection of weakness of the economy. The first month July trade imbalance reached $1,195 million against $899 million of July last year. It also showed the volume of foreign trade rose substantially high demanding more dollars to continue the trend. Importers said the rising demand and falling foreign exchange reserves have an inverse relation. If this equation is not changed, the situation will soon reach a point of no return. "Finally we will have to seek IMF help as a last resort and put the entire nation under the harsh conditions which IMF used to prescribe for the successful use of loans," said Abid Saleem, an analyst.
Investors said the deadlock between the two main coalition parties over the restoration of deposed judges was dashing hopes. "The political situation is not helping the foreign exchange market," said a trader who declined to be named. "The underlying economy is not great either." "Unless you get a balance of payments solution, I don't see anything else but further weakening of the rupee ahead," he said. After six years of healthy growth under Musharraf's rule, the country's economy is struggling with widening trade and fiscal deficits, soaring inflation, and falling foreign exchange reserves depleted by high oil prices. The country's central bank is set to announce later this week the size of the current account deficit in July.
The only regiment of the society which is happy over the rupee devaluation is our exporters. Pakistani exporters appear glad over the steady devaluation of Pak rupee against the US currency in last couple of months. The exporters would get 14 rupees extra with each and every dollar that would compensate their financial woes of the previous two to three years, an exporter said. The dollar-rupee exchange rate remained stable during the past three years as a result the export industry continued to bear the inflationary pressure and international competition, he said, adding as the dollar-rupee exchange rate had widened to around 77 rupees last week, this development was being seen as a miracle for the export industry.