PKR DEVALUATION TO SLOW DOWN ECONOMIC ACTIVITIES
Oct 12 - 18, 2009
Continuous depreciation of Pakistani rupee against the US dollar and other foreign currencies since the beginning of 2008 has not only badly affected economic growth in the country, but also hit all the important areas of economy from agriculture to industry; manufacturing to import of goods; and IT sector to students studying abroad.
Devaluation of Pak rupee also caused financial difficulties for different institutions and during the first quarter of current year, the PIA alone suffered a loss of Rs 1.9 billion out of which Rs 1.7 billion losses occurred due to exchange rate depreciation or dollar-rupee disparity.
The government needs to take immediate measures to arrest further devaluation of rupee to avoid more damaging consequences posed to the economy. With inflow of forex from overseas Pakistanis through official channels, the foreign reserves can improve significantly hence the government should take steps in this direction.
Analysts told Pakistan and Gulf Economist that the Pakistani rupee would likely to fall marginally this year on increased dollar demand from oil imports, as the government projected a 29 percent jump in oil needs for power.
According to them, the Pak rupee has already lost 5.1 percent so far this year - 2.4 percent in July alone - after plunging 22.1 percent in 2008 because of a soaring import bill and a sharp fall in exports.
"We expect the Pak rupee to continue to depreciate against the dollar over the medium term. We see the rupee at 86 levels by June 2010, driven by higher commodity prices and exchange rate reforms," said an analyst Ishaq Abbasi.
Central bank's gradual cessation of providing official foreign exchange reserves to pay for oil imports is forcing importers to buy the dollars they need from the interbank market. "Shifting of diesel oil payments to the interbank market has added to the buying pressure in the interbank market, leading to the depreciation of the rupee," he opined.
He further said that new power plants would drive oil needs for the power sector up to 45,000 tonnes a day from the current 35,000 tonnes per day. It is not clear whether the government would actually be able to secure the additional required oil, as it is currently only getting supplies of 24,000 tonnes per day on average, cutting into electricity output. Oil remains the key dependency, making the economy highly vulnerable to changes in oil prices, which will be reflected in higher inflation and a weaker rupee, he said.
A leading textile industrialist and Vice Chairman FPCCI's Standing Committee on Textile Ancillaries, Mian Faraz Alam, told PAGE that depreciation of the Pak rupee was multiplying the cost of doing business and badly affecting the industrial, manufacturing and agriculture sectors as Pakistan had to import fertilizers, food items, oil, machinery and industrial raw material.
He said though the weaker rupee should benefit to exporters by giving them more rupees per dollar, but this benefit was neutralized by the costly imported inputs of manufacturing sector including textiles thus eroding the financial advantage of a weaker rupee.
According to him, our economy is in slump as all sectors of economy are showing negative growth and warned that further fall in value of rupee would cause more contraction in economic activity leading to reduced tax revenue for government and huge foreign debt.
Mian Faraz Alam further said that decline in the exchange rate goes on in spite of the fact that foreign exchange reserves have almost doubled, which should be a cause of great concern for policy makers. In this scenario, depreciation of the rupee at its current pace won't push up exports, rather will certainly inflate import bill and inflation that, over the years, became closely linked to the exchange rate because of Pakistan's ever higher reliance on imports, particularly of energy inputs, he added.
Faster the depreciation of the rupee, higher will be inflation and lower the competitiveness of Pakistan's business and industry, he opined. Therefore, the government should get quickly into action to arrest this dangerous trend to bring stabilization in exchange rate to protect national economy from further damage, he remarked.
He has linked industrial revival with the implementation of the government policies and the ability of its economic managers to fulfill the promises they made with the industrialists at different forums.
Mian Faraz Alam said that power and energy shortage had crippled the basic textile industry. "For the last six months textile sector was subjected to daily five hours load shedding. Financial constraints of basic textile units have been compounded by the high mark-up of the banks," he added.
"Electricity tariff for industrial sector in Pakistan is Rs 9 per unit against Rs 6.50 in India, Rs 6 in Bangladesh and Rs 7 in Sri Lanka. Bank mark up in Pakistan is 16 percent whereas in India it is 7 percent."
He said power shortage was a real issue. Electricity shortage in the Indian Punjab is to the tune of 8000 mega watts and industries are mostly run on furnace oil power generators. "Pakistan should concentrate on producing electricity from Thar coal to reduce the cost and shortage of power," he added.