DOLLAR APPRECIATION AUGURS INFLATION
PKR IS YET TO REGAIN VALUE DESPITE IMPROVING INDICATORS
TARIQ AHMED SAEEDI (email@example.com)
Oct 12 - 18, 2009
While the recession is almost over with improving signs of macro economic indicators in Pakistan, the lost value of Pak rupee against US dollar has not been revived so far and that still stands on the position it had when inflation was historically high, current account deficit far wide, and foreign exchange reserves touching lowest ebb. Not to go far away a recent past could make one refer PKR value against dollar at Rs62 per dollar in January 2008 and Rs72 in the mid of the same year. Following developments inflicted challenging recession on the economy and further deprecation found convincing arguments. Multicolored Pak rupee is ready to lose its value against greenback every time macro economic indictors of the economy are disturbed. Presently, PKR value is hovering around Rs83 per dollar despite improving inflation, reserves, and current account deficits.
Headline inflation decreased to 10.7 percent in August 2009 from August 2008 year on year. However, monthly inflation accelerated to 1.7 percent in August 2009 from 1.5 percent in earlier month. General inflation is considered temporary reflection of the economy, since impulse spikes of food and energy costs affect it. Core inflation (NFNE) showed a declining trend however. In August, non-food and non-energy inflation declined to 12.6 from 14 percent in July year on year.
Foreign exchange reserves reached to highest level of this quarter (over $14.50 billion) last week. It is recallable that historically highest foreign reserves held by the country were no more than $16.75 billion during October 2007. A sudden freefall of foreign reserves was started in the next year and by end of November 2008 Pakistan was on the verge of default on international debts' obligations because of holding lowest ever $6.6 billion. With whatever repercussions and motives International Monetary Fund (IMF) accosted to grip faltering economy of Pakistan by approving $7.6 billion loan. The loan became a much relief for the government to maintain balance of payments and weather recession. Non-materialization of pledges of $5.7 billion made by friends of democratic Pakistan in Tokyo would exceed IMF's loan package to $11.3 billion.
There is still a considerable current account deficit, but the shortfall bottomed in the July-August 2009-10 to $527 million. In the corresponding months of last fiscal year current account deficit skyrocketed to $2.67 billion. In addition, trade deficit dropped almost one billion US dollar to $1.98 billion over $2.74 billion in the same period last year because of decline in imports. Workers remittances showed upward trend in the starting two months of current fiscal year. At $1.52 billion, they made a perceptible difference over an earlier $1.21 billion. Monetary analysts say unlawful fixing of exchange rate causes inflation.
US government is interfering in the market forces behind dollar fluctuation to get trade benefits. Dollar is losing face value against euro and in international forex market, the demand of dollar is being overpowered by that of gold, silver, and other metals. Investors have begun parking their dollars in metals to get compensation of collapsing real estate and stock securities. There are some clear-cut reasons pressing Washington to tinker with exchange rate. However, economists have warned a bout of inflation in US as a result of intervention. Massive inflation has already arrived in the US, reported Reuters. "It is a real shame that those who lost most of their money in the stock market and Real Estate bubbles, and are now finally selling out after these markets have already collapsed, are positioning themselves to get wiped out all over again through massive inflation," the news agency quoted Ben Bernanke as saying. US economy is passing under severe budgetary deficits due to last year's huge expenditures to rescue falling financial institutions and contracting tax revenue. The budget deficit reached to $1.4 trillion at the end of fiscal year (2008-09) ended September 30 that is equivalent to 9.9 percent of its gross development products and that is a substantial shortfall after one that ensued following World War II.
Besides, China, France, Japan, and Middle East are up to getting rid of dollar dominancy over international financial system. China has already launched bond in international market to enhance Yuan acceptability. Yuan-dominated bonds are in addition to persuasion by Chinese government to investors to invest in metals. Most of these countries are accumulating foreign reserves in euro or gold. Asian central banks are making gold reserves. Although the revelation by Robert Fisk, Middle East correspondent of The Independent, of this machination was denied officially, the correspondent was adamant of proving anti-dollar design and covert intentions to replace dollar pricing of commodities (especially oil) with basket of currencies. Oil is a commodity, which is planned to be priced other than US dollar by 2018. Dollar is the dominant currency in international trade. "Of the $7.2 trillion in international reserves, $2.1 trillion is held by Arab countries - China holds around $2.3 trillion - and the nations interested in moving away from dollar trading in oil are believed to hold over 80 per cent of international dollar reserves," wrote Robert Fisk in an article. Fixed exchange rate dominated the global financial system until 1970, when the system proved ineffective. Fixed exchange rate system did not allow countries to pursue their own fiscal and monetary policies.
Market forces (economic strengths) determine floating rate and with Pakistan's weak market fundamentals like uncertain inflation, consistent trade deficits, and over dependence on greenback reserves what better position Pak rupee can hold over currencies of trading partners, most of them are swapping in dollars? At least, it can control inflation bubble through freeing demand and supply of forex mechanism of intervention. It is too untimely to invest reserves in gold and other metals or replace foreign exchange with euro. Making trade in single currency other than dollar can be a good starter.