TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Sep 1 - 7, 2008

What drives dollar to outpace Pak rupee? Are there genuine determinants in the Pakistan's economy to determine rupee-dollar parity? Few market pundits count budget, current account deficits, quantum import ratio, and inflation ratio to trading partners as important determinants. Certainly list includes foreign reserve depletion of that is culpable in incising rupee value against greenback. Questionably, that impulse depletion is incomprehensible.

A forex analyst denies presence of any genuine determinant behind the rise of dollar value in relation to Pak rupee. "State bank can appreciate and depreciate dollar value at its discretion," he says. Intervention by the State bank in the inter bank market stopped the exchange companies from sending cash abroad in pound sterling, UAE Dirham, and Euro.

S&P and Moody's Investors service, which reports reserve depletion is the most 'imminent risk', cut their foreign currency debt ratings for Pakistan in May to B and B2 five levels below investment grade.

Last government proved its ability to confine rupee-dollar disparity to mere in between 60 and 62 during all its ruling; whatever might be the reason. "It was in fact this unnatural confinement that finally the bubble would burst today," argued a forex analyst. "Hadn't this financial manipulation occurred, the recent impact on Pak rupee would have passed in phases instead of instantly," he maintains.

Former president Musharaf's exit spurred the rupee to appreciate to 74.35 per dollar within two days. 'Last government was blessed with mainly foreign investments in form of foreign direct and portfolio investments, privatization proceeds, workers' remittances, and foreign subventions that included amount dispersed for Pakistan's military support in war on terror", answered abruptly economist Dr. Shahid Siddiqui when asked that how past government became able to retain dollar appreciation. It is relevant to underscore that when erstwhile economic managers along with former president Musharraf were confronted with maiden backlashes by the rival cohort. The case which was made against them was that statistics showing economic growth were actually fabricated.

"The proclamation of emergency in November, 2007 rendered major loss to deposits of foreign reserves," he said. The sandwiched October of the same year was probably the ending point when foreign reserve of the country witnessed a spell of exuberance to have reached to 16.4 US Dollars. Otherwise November bided adieu to the golden era of robust economic activities and saw foreign reserves brief dip to $15.8 billion and further to $15.5 billion in the following month. Barring negligible instances of slight uptrend continual dwindling of foreign reserves caused total volume to come down to $9.5 billion, that is plunging day by day up till recently, making Pak rupee easy ride for greenback.

According to Bloomberg, the rupee is the world's fourth worst performer behind the Zimbabwean dollar, Turkmenistan manat, and Icelandic krona. The economy of Zimbabwe has been inflicted with the hyper inflation in particular astronomical food price rise recently. Even fetching bread in the country would become a highly expensive routine.

Pakistan is not sole developing country facing multi pronged inflationary pressures. There are various other economies enduring double digit inflations world over. According to the Economist Intelligence Unit, the consumer price index inflation in Sri Lanka was 17.5 percent in 2007, followed by Bangladesh 9.1 percent, and India 6.4 per cent. Pakistan's economy witnessing 24 percent hardcore month to month inflation should have gained access to compensation following significant decrease of international oil price from $146 to as low as $112 per barrel. Since the country's oil import bill has highest weight in international trade account, the decrease was believed to benefit the economy as a whole. In contrast, likened to one misery ends to give way to another rupee has started free fall in relation to dollar. Therefore, any oil price relief that may have bagged was invalidated due to rupee depreciation.

In Pak rupee, oil import bill was of 2.5 trillion in last fiscal and in case of non payment obviously the bill increases in congruent with local currency devaluation or national dollars depletion. Saudi Arabia is the largest exporter of oil to Pakistan and has been supplying to the country crude on deferred payments. It is advantageous for oil exporting country to reschedule debts of importing country currency of which is under pressure. According to an estimate, the outstanding against Pakistan reached to $5 billion. That is why; government of Pakistan has requested Saudi government to give it access to Saudi Oil Facility on deferred payments further on. "If this happens, Pakistan would save sizeable foreign reserves," says Dr. Siddiqui. But there has been no positive response from the side of Saudi government so far, he adds.

In addition, oil import bill causes outward flows of foreign reserves. To say that it is a scar on the balance of trade is not wrong. Spurred by import outweighing export, trade deficit alone in the starting month of the current fiscal year calls serious economic management which must take into account affects of corrective measures on economic performance. A balance must be ascertained. Although current account deficit peaked to $14 billion, 8.4 percent of GDP, more than double the figure of $6 billion of FY07 would the government bring the deficit back to targeted level by restricting official transfer of capital and condoning over unofficial outflows? Billions of dollars go undocumented. Similarly, cut in development expenditures is feared to leave a drastic impact over economic progress. Instead, government should scale down the borrowing, which is still in trillion rupees, and must slash instead of rationalize non development expenditures to reduce gap in budget deficit that is a decade high of 7 % of GDP.

In such a precarious situation privatization proceeds and loans of international financial institutions can be of great help to enlarge foreign reserves. The aim to increase reserves to $12 billion sounds good, but root cause of sudden foreign depletion and determinants of rupee-dollar wide disparity should be recognized. It is generally believed that political uncertainty is fuelling rupee devaluation. If it is so then the quicker this political wrestling concludes better is for a nation. Management inefficiency can also be cured otherwise.