RECONSIDERING PKR PEG WITH USD
TARIQ AHMED SAEEDI (firstname.lastname@example.org)
May 26 - June 01, 2008
The depreciation of Pakistani currency against US dollar that may be effective to enhance the export competitiveness is giving a hard billow to local as well international businesses. At the time when multi national companies are finding their profits when converted to US dollar slumping local manufacturers are too experiencing the similar fate.
Not first time though this corrective measure of devaluing Pak rupee against US dollar has been redundantly taken this time to inflate value of foreign reserve. In a subsequent effect, costs on numbers of imported products including raw materials have soared to all time high. It should be noted that many time the effect is known to be a chief cause of currency devaluation. Inflation in the country has broken all past records and touched double digit figure. Price rise of commonly consumable items not only has incapacitated public purchasing power but also inflated cost of doing business.
Among others economic factors on which foreign exchange rate highly depends trade and current account balance, inflation rate, ceiling on exchange rate fluctuation, and cost of borrowing are considered important ones.
In terms of balance of payment, the sign for the economy is not positive as trade deficit has risen to over $16 billion, an astronomical gap for a developing country like Pakistan. This trade gap was not as much widened by underperforming exports as by overarching imports.
Free trade regime has exposed the country to uninvited foreign experimentations followed by opportunistic capital seeking its way into transitory market for overnight profit. Excessive dependence on foreign investment to manage the economic affairs and for that matter permission of cent percent equity transfer has indexed the country's trading graph positive for the investors particularly who play around short term gain.
Therefore, foreign portfolio investment and capital market are flying higher and higher inconsiderate of how much of these funds in actuality land into the mainstream economy. Pakistan's financial scene has been so bright to attract lot of investments in its debt instruments and marketable securities. But, sectors demanding investment endurance like manufacturing have not been paid as much attention. What happened in result was focus concentration towards few portions of trade and industry which have been signifying local trade competitiveness and major foreign exchange spinner for years.
In which, textile sector has been greatly overloaded to constitute trade surplus given the fact that absolute self sufficiency and industrial efficacy is remote in sight as major inputs are to be imported in this sector. The more is to be spent on imports the more deletion of dollars is resulted from foreign exchange reserve.
The country is facing current account deficit of near 7% of GDP that is about 3% higher than the targeted. It clearly indicates government's regular resort to central bank reserves for meeting expenditures. So far so internal current account deficit is tarnishing the international credit rating of the country. For example, Moody's has lowered rating of Pakistan government bonds down to B1 from B2, foreign currency bank deposit from B3 to - B3, and rating of foreign currency limit for Pakistan from Ba3 to - Ba3.
Since PKR is pegged with the US dollar any impact of value fluctuation in dollar implies depreciation or appreciation of Pak rupee. However, the value of PKR had continued to maintain its value against dollar since 1972 when perhaps first time government decided to devalue PKR by about 68 percent. Since its inception, Pakistan's economy was operative under a fixed exchange rate system. But, in 1972 the Government of Pakistan decided to devalue its currency by about 68 per cent. In spite of this Pakistan remained to follow fixed exchange rate system.
In 1982, once again the Government resorted to devaluation however this time the value of foreign currencies appreciated by about 100 per cent. At the same time floating exchange rate system substituted the old fixed exchange rate system.
Presently, the value of PKR is higher than that of 12 countries including at least of three developed economies like Japanese Yen, Indonesian Rupiah, Chilean Peso, Columbian Peso, Hungarian Forint, Iranian Rial, Icelandic Krona, Korean Won, Sri Lanka Rupee, Nepalese Rupee, Slovenian Tolar, and Venezuelan Bolivar. It is not that total freedom of local currency from the value variation of foreign currency can bring the equilibrium in economic activities. But, close linkage of PKR with USD has put the latter in relative disadvantage at the time when EURO peg might prove itself profitable.
Economists suggest that Pakistani currency should be pegged with Euro as its exchange rate value in international market is increasing as contrast to historically falling US dollar. Now the world is following the dual currency standard, one is dollar and second is Euro. Anticipating the situation in advance, China has taken earlier decision two decades ago of fixing its currency to the dollar. Similarly, Japan predefines a ceiling for its currency value fluctuation against the dollar.
Defining certain limit to fluctuation affect would be beneficial for the sustainability of the economy. As there is no volatility of ups and downs in the exchange value, businesses may become more analytically established. Moreover, cost of doing business can be reduced especially for import dependent ventures. The cost effectiveness of any business is not necessary for an investor but also for its ultimate targets, consumers. The cost of business determines the retail price tag of a product. The reverse is tantamount to detract potential investors as that may be the case at present in Pakistan where flow of foreign investments in productive sector has been barred owing to exchange rate disparity. Rather, multi national companies that have so far been enjoying barrier free profit transfer to home countries are in a quandary to maintain regular profit line. Government needs to reconsider PKR relation with the USD.