IMPROVING BUYING POWER
TARIQ AHMED SAEEDI
Sep 6 - 12, 2010
Imports constitute vital portion of the economic activities of Pakistan and almost all sectors depend on products from across the border to contribute their shares in the economy. Since Pakistan's economy is based on primary sector, even its exportable products compose of inputs mainly imported from outside the country. Petroleum products are the central drag on foreign exchange of the country while machinery, telecom sector, consumer goods, and transport group play second fiddle to weigh on foreign reserves made up of US dollar. Devaluation of Pakistani currency against US dollar directly results in to rising import bill and widening trade deficit in an effect.
So far this year, Pak rupee has lost around one per cent value to greenback. Pak rupee has been under depression since the beginning of new political government in the country. In fact, every year, rupee saw cut in its value against dollar and it has never risen above US dollar in the country's history. Nevertheless, aggregate percentage depreciation of rupee against greenback in last two years will come to no less than 30 per cent. And, the biggest percentage loss was seen in 2008 when drawdown of foreign exchange weighed on rupee value and brought it down 22 per cent against dollar. Last year, however rupee lost 5.9 per cent.
Some economists and independent analysts are not foreseeing recovery in value of rupee this year too and forecasting further slump by end of 2010. "The rupee will continue to fall in the next three to four years and may weaken 4.4 per cent by December 31,î an economist at Standard Chartered told Bloomberg. "Pressure on the currency is increasing as foreign investment continues to decline." Considering erosion of rupee value to dollar by five per cent in financial year 2010 as compared to 19.5 per cent in financial 2009, it seems that Pak rupee has bucked the past trend of depreciation; and that apparent shift or stability in rupee value is attributed to improvement in remittance inflows and intervention of the State bank to ease pressure on exchange rate through increasing foreign exchange exposure limits of commercial banks.
Such measures can control the volatility for a while and for long-term stability of rupee, concrete supports should be come from reduction in trade deficit and acceleration in recovery from flood after effects. Remittances are equally vital for the economic revival. Last year's improvement in remittances and decline in trade deficit played major role in building up exchange rate stability. Trade deficit contracted by 10.5 per cent and remittances from overseas Pakistanis scaled 14 per cent to 8.9 billion dollar in financial 2009-10.
While importers remain net looser of deprecation in local currency, exporters take profits of it. Understandably, cost of imported products increase when currency loses buying power in foreign currency. For example, petroleum product price in international market has nosedived to 70 dollar per barrel from its highest 147 dollar per barrel year ago. Nevertheless, prices of petroleum products in Pakistan, which meets 70 per cent of its domestic demand of oil from imports, have not reduced in tandem with declining trend in international market. It is a separate argument that incumbent government blames past regime for controlling devaluation of Pak rupee and petroleum prices arbitrarily. Former government comes under broadside even now for subsidising petroleum products at the cost fiscal discipline. In reply, critics say this government overlooks dollar crunch in market erodes rupee value so that export sector gets the benefits. An opposite case can be found in recent disappointments of industrialists in Japan over failure of Bank of Japan to weaken yen against US dollar. Japan exports are worried over reduction in profits when repatriated owing to strong yen. Canon, Sony, and some other major listed exporters in benchmark Tokyo index Nikkei are undergoing loss of percentage points in their share values as the issue is being prolonged.
Though trade deficit in Pakistan in recent years showed downward trend, yet it was attributed to reduction in imports instead of rise in exports. Trade deficit declined to 11.42 billion dollar in financial 2009-10 from 12.62 billion dollar in the previous year. Last year, imports decreased 2.2 per cent. In 2008-09 also, the imports' growth rate stood at negative 10.3 per cent. Exports from the country rose 2.7 per cent to 19.63 billion dollar in FY10 from 19.12 billion dollar in FY09.
Pak rupee comes in the stable mode in recent time because of substantial inflows of remittances from overseas Pakistanis and improved foreign reserves, but depreciation of rupee to dollar in coming months cannot be overruled as restructuring and rehabilitation costs of floods are demanding belt-tightening measures from the government. Forex analysts fear rupee to reach Rs91 per dollar by yearend since they see current stability rupee as transitory. Foreign reserve position seems to be strengthened in days to come in view of pledges and commitments for flood victims by different countries and international financial institutions. Early realisation of such pledges will provide the government a timely fiscal space to overcome the crisis that has taken heavy toll on the economy. However, macroeconomic balance needs injection of foreign pledged liquidity by friends of democratic Pakistan and IMF. Financial supports by international financial institutions will come to a halt in case of noncompliance of Pakistan with conditions stringed to loan programmes. These conditions open up Pandora box of harsh steps by the government; reformed general sales tax or value added tax is one of them. International loaner takes in to account tax ratio in the country before executing programme and insists on tax reforms to enhance tax revenue thick and thin. Inflation can only be controlled by industrial expansion and growth that will play a major role in economic growth that has already been revised downward.