GROWTH OF PER CAPITA INCOME DEPENDS UPON STABILITY OF EXCHANGE RATE

SYED FAZL-E-HAIDER
Sep 29 - Oct 12, 2008

The gross national product (GNP) divided by the population results in per capita income of the country. Per capita income, the gross domestic product (GDP) and inflation are interrelated. Higher the inflation rate, larger would be the per capita income. During last fiscal year 2007-08, the per capita income increased from $926 to $1,085. Last fiscal year, the higher inflation had been an important factor in pushing up the GDP and the per capita income. The per capita income for the last fiscal had been calculated on the basis of an exchange rate of Rs61.30 to a US dollar. The growth of per capita income depends upon stability of the exchange rate. Currently Pakistani Rupee is continuously weakening against dollar and it has touched the figure of Rs.78 to a dollar.

The currency's strength against the US dollar is instrumental to push up the per capita income. While dollar has fallen against euro and yen in volatile trade as losses in US investment, banking, stocks and doubts over the bailout of insurer American International Group fuelled financial sector fears in the Asian trading, the Pakistani rupee further lost its value against the US dollar in the interbank market on September 18, losing 40 paisa for buying at RS 77.70. The analysts fear that the rupee may further erode its value touching a record low of Rs.100 to a dollar if immediate measures are not taken to stabilize the local currency.

Pakistan's balance of payments' vulnerabilities are increasing due to the widening current account deficit and rapidly depleting foreign exchange reserves, which is putting pressure on the rupee. The analysts warn that the rupee will remain under pressure until the government takes some constructive steps to tackle the balance of payments and fiscal deficits. The central bank' Governor Dr Shamshad Akhtar has said that the measures taken by central bank on May 22 for regulating the currency market has worked well to seize steep fall of the rupee. Dr Akhtar said that fluctuation in dollar-rupee party would have been much faster if SBP measures were not taken timely. She fully supported the government plan for stabilization of the economy by cutting down subsidies and relying on other sources instead of borrowing from central bank.

Inflation is the greatest risk and biggest policy challenge for the government. While inflation has peaked in China, South Korea and Thailand, it is accelerating in countries like Vietnam and Pakistan, according to Manila-based Asian Development Bank. According to the official sources, Pakistan's inflation hit a 30-year high in June.

As per August report of FBS, the consumer prices index jumped 25.33 percent from a year earlier, after reaching 24.33 percent in July. The relentless surge in prices of essential commodities has eroded the purchasing power of middle and lower income groups in Pakistan. Six-time increases in oil prices over the past few months and surging energy costs have pushed prices of essential food items to an unprecedented level. The inflation scene is currently dominated by food inflation, which is hurting low-income groups disproportionately. The Consumer Price Index (CPI) food inflation began to strengthen in September 2007 and was recorded at 16 percent in February 2008 after reaching a local peak of 18.2 percent during January 2008, the highest level seen since April 1995. The food inflation, measured through CPI rose to record 25.50 per cent in April 2008, the highest not only in the country but in the entire region.

Weakening rupee value is also a contributing factor for inflation. The poor and the lower middle class find it increasingly difficult to make both ends meet with soaring prices of essential commodities including foodstuff. The steady increase in the prices of 24 consumers' items has pushed up the overall inflation to a new historic height. The poor are highly sensitive to the price changes in food, particularly staple food items. The experts believe that rising food prices can undermine the gains from poverty reduction and human development that the country has experienced for the last five years. Households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children's education.

Last few months witnessed the highest-ever increase in oil prices, which pushed the retail price of every commodity and the inflation registered new records. The major factors contributing to the rising inflation include demand-supply problems, excessive borrowing by the government and delayed but compulsory adjustment in oil prices. According to the official sources, the spiraling food prices and weakening rupee pushed up inflation to an all-time high of 21.53 per cent in June 2008, after a 2.10 per cent rise in consumer prices over May 2008. During July-June 2007-08, average food inflation stood at 17.64 per cent and non-food at 7.89 per cent against 10.28 per cent and 6.01 per cent respectively in the previous fiscal year.

Officials in Islamabad have however rejected any default risk for Pakistan after crude oil prices in the world market have sharply declined to below $90 per barrel. Moreover, cut in oil subsidy has also provided the country much room to manage its foreign liabilities comfortably. Unprecedented rise in oil prices in the global market had exposed Pakistan's economy to serious risks. Finance Ministry is currently following a multi-pronged strategy to save every possible penny by cutting down non-developmental expenditure and removing distortions in economy that pushed the economy into the grey area during the last few years.

The government should take measures to maintain the exchange rate stability. The increase in the GNP for the current fiscal year is likely to be neutralized, as the exchange rate is currently declining against the US dollar. Resultantly, the per capita income is likely to decline, despite an increase in the GNP. The impact of exchange rate in calculation of revised duty drawback rates has not been worked out despite announcement of federal budget in June 2008. The existing standard duty drawback notifications are based on the exchange rate of Rs 58-59, which was taken at the time of revision of rates in budget 2007-2008. There is an immediate need for annual revision of duty drawback rates, as the first quarter (July-September) of current fiscal is going to be ended in two weeks. The exporters have to suffer losses for claiming rebate and duty drawback on the basis of export goods quantity calculated in kilograms. The working of duty drawback in kgs on the old exchange rate has negative implications for the export sectors.