DESTABILIZATION TAKES ITS TOLL
SHAMSUL GHANI, email@example.com
Sep 1 - 7, 2008
After maintaining an almost stable stance for the last five years (2002-07), the US dollar has started eating away Pak rupee with a vengeance. The long drawn, close dogfight has suddenly turned into a rupee-demolition saga. Not the US dollar alone, other currencies too seem bent on cutting the Pak rupee to size. Although the US dollar itself is under pressure from other currencies in the US economic slowdown scenario, the decimation of Pak rupee at the hands of US dollar should not be difficult to apprehend in the face of destabilization process the country is in for the last one year or so. Nation's favorite DD game (Democracy and Dictatorship game) that must take place after every 8-10 years is on and all segments of the society are having busy in the office.
The odd-man-out economist is the only one watching in horror the entire proceeding. The game is loaded with many twists and, therefore, a conclusive end is not in sight, at least for the time being. The State Bank, with its monetary and exchange policy measures has tried to intervene more than once, but the desired market response still remains elusive. The investors have decided to opt out from Pakistani markets to some other stable markets. Despite being not so stable, the US dollar is globally in greater demand following the unprecedented oil price hike, courtesy the single currency (US$) denomination of oil. Our stock market, down by 42 per cent, has seen exit of many big investors with sizeable exposure. The exited money, either has flown out in the shape of dollars, or has made entry into the currency market with an aim to target dollar. Seeing the continuous rupee slide, the exporters have substantially scaled up their export volume to subsequently benefit from a further fall in rupee value. These factors, in tandem, are wreaking havoc on Pak rupee. The following table shows the southward journey of Pak rupee during the last eight months:
TABLE - FOREIGN CURRENCY OPEN MARKET RATES IN PAK RUPEE
since 24 Dec-07
since 11 Jun-08
Business Recorder, Karachi (27 August 2008) reports, "slight recovery was seen in the rupee-dollar parity rates on the inter-bank market on Tuesday, dealers said. The rupee gained 10 paisa against dollar for buying at 76.50 while it rose by 5 paisa for selling at 76.55, they added. They also said that despite the small recovery, general trend in the rupee was weak due to hovering uncertainty on the political front".
THE SITUATION DEMANDS ACTION
The huge trade deficit of $20.75 billion becomes still more alarming when seen in the perspective of a rupee slide. The dried-up foreign investment scenario will call for procurement of dollars from the market at a higher rupee-cost to be able to foot the trade bill. Unfortunately, the FDI dollars have historically been utilized for consumption rather than for fixed capital formation. Even if the IMF is approached for financing of trade deficit, the debt servicing rupee-cost will continue to rise in the face of an appreciating dollar, the stiff IMF conditions notwithstanding. Moreover, the trade deficit is likely to be scaled up as export proceeds take longer to reach Pakistan as against the import payment which must be made forthwith. In the normal circumstances, a certain portion of export proceeds, utilized in buying foreign assets, never reaches the country. This hurts the export estimates which are ultimately reviewed downwards. In the present scenario, the exporters are said to have opted for a delayed receipt from the overseas importers, in order for the exporters to benefit from a further rupee slide.
The gray areas in our reporting systems for foreign exchange reserves, external debts, foreign trades etc leave us in the dark as to the calculation of real impact of rupee slide. External liabilities and foreign exchange reserves are reported in dollar equivalents. The composition of various currencies in which the debts were actually incurred and the different currency components of the total dollar-denominated exchange reserves have much to do with the sizing up of rupee-slide impact. At the end of FY08, the external debt stood ballooned-up at US$45 billion. A major portion of increase during the year has resulted from rupee depreciation. Further, the impact of dollar depreciation vis-‡-vis other foreign currencies is also relevant in our case as we are practically pegged to the dollar. The management of an optimal currency mix in exchange reserve account to match the external debt servicing program, therefore, becomes a highly complex and sophisticated area and needs to be handled by the experts. Moreover, the selection of import source and export destination also matters in the current scenario. The gravity model centers around a cost-effective trading system that takes into account the country land mass and its distance from the trading partners. A new dimension, currency of transaction, also needs to be added to this model to make it more realistic.
The present situation is fraught with a number of economic and financial hazards. Scarcity of dollar resources in the face of mounting debt servicing and current account problems is all set to throw us back into the lap of IMF. The politically destabilized country with its globally tarnished image looks destined for an imminent economic collapse. This is one side of the picture. For the rosy side to overshadow the darker side, the democratic set up of this country will have to shift its focus from the mundane political issues to the grave economic crises. The potential is there; the will seems to be lacking. Put an immediate ban on all non essential imports. Develop agriculture and energy sectors on war footing. Control stock market and rupee slides. Rejuvenate Pakistani markets to attract back the run-away foreign investors. We can't wait for the things to fall back in position. We will have to take initiatives to make things happen.