PKR DOWN DESPITE STABLE FOREIGN RESERVES
July 26 - Aug 1, 2010
Pakistani rupee continues to decline against the greenback despite the record remittances from overseas Pakistanis and high foreign exchange reserves, which have risen to $16.767 billion, higher than the previous record level of October 2007, when the reserves touched $16.45 billion. The currency dealers link the fall of Pakistani rupee to a record low this week because of increased dollar demand for import payments, especially oil predicting rupee to remain under pressure. The dealers expect that the rupee, which is presently being traded at over Rs85, is likely to hit Rs86 to a dollar in the short-term, as the exporters are holding on to dollars on the expectations that the rupee will further weaken. The analysts argue that high foreign exchange reserves and remittances have failed to strengthen the rupee because the new record reserves contain most of the borrowed money, while the reserves of 2007 were purely net cash of the country. The weakness of the record reserves is seen the main reason behind the rupee's declining trend.
The country received $8.906 billion remittances during the fiscal year ended June 30, 2010, which is the record amount ever remitted by overseas Pakistanis, according to State Bank of Pakistan. It was more than the target of $7 billion set for remittances in the Annual Plan for FY10. The overall remittances in 2009-10 showed an increase of 14 per cent when compared with the previous highest $7.811 billion received in 2008-09. The monthly average remittances during July-June 2009-10 came out to $742.16 million as compared to $650.95 million in 2008-09.
According to the central bank, the inflow of remittances in 2009-10 from UAE, Saudi Arabia, USA, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $2,038.57 million, $1,917.66 million, $1,771.19 million, $1,237.87 million, $876.38 million and $252.22 million respectively, as compared to $1,688.59 million, $1,559.56 million, $1,735.87 million, $1,202.65 million, $605.59 million and $247.66 million respectively, in 2008-2009.
Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries in FY10 amounted to $810.98 million as against $771.03 million in FY09.
The government had launched a joint initiative called Pakistan Remittance Initiative (PRI) in the last fiscal year with a view to facilitate the flow of remittances through formal channels. Remittances witnessed considerable growth through formal channels as a result of PRI.
The country's foreign exchange reserves have risen to $16.767 billion, with $12.951 billion reserves held by the central bank and $3.816 billion by the scheduled banks. The reserves went higher since the country received $470 million from the Asian Development Bank, $95 million from World Bank and $185 million as grant from the United States at the end of last month.
The high foreign exchange reserves could not help stabilize the exchange rate and strengthen the local currency. The country will have to pay back the loans by next couple of years, especially the emergency loans of $11.3 billion from IMF.
The country's exports constitute about 34 per cent imported material. Local currency dealers contend that the country's imports were almost the same in the fiscal year 2009-10, which ended on June 30, as these were during the previous year, but exports increased by six to eight per cent, reflecting the pressure on dollar demand. The importers have purchased the dollar heavily because of the rising imports, which revived economic activities during the second half of the fiscal year 2009-10 because of higher lending by banks to the private sector and the government's decision to revise the economic growth rate from 3.3 to 4.1 per cent.
Pakistani rupee is persistently buckling under pressure, as the dollar soared to an all time high at Rs85.50 this month. The excessive buying of the greenback by the banks pushed up its demand at interbank market against the local currency. The demand for oil payments actually raised the dollar demand and dragged down the rupee to a four-month low, as buyers recently lifted around $90 million from the market for corporate and import payments.
The currency dealers expect the rupee slide to continue, as the recovery of dollar on the global markets and its shortage in the inter-bank market could further put pressure on the rupee. Surprisingly, the rupee is depreciating against dollar despite strong foreign exchange reserves and a very low current account deficit, reflecting the inner weakness of the economy.
Analysts believe that harsh budgetary measures to boost revenues in the current fiscal year 2010-11 could dampen the market activities while consumption level may fall further. They argue that the low consumption squeezes the production capacity of the economy and hits most of its segments. This situation reflects poor economic growth expectations next year, which may further weaken the rupee, according to the experts.
The rupee's previous record low was set in February when it eased to 85.15. The rupee has lost 0.99 per cent against the dollar this year after losing 6.17 per cent last year and a 22.12 percent slide in 2008.
The local currency had largely been stable since November 2008 when the country was forced to turn to the International Monetary Fund (IMF) for a $7.6 billion loan to avoid default on foreign payments. The loan amount was later augmented to $11.3 billion in July last year. The country received fifth tranche of $1.13 billion from the fund on May18.
The rupee has lost around 35 per cent against the dollar since February 2008, when the Pakistan Peoples Party-led coalition government came to power. The frequent depreciation of the exchange rate in two years added Rs1125 billion to public debt, significantly increasing the rupee cost of foreign debt servicing. The total foreign and domestic public debt is at 58.1 per cent of the GDP, according to Debt Policy Statement 2009-2010. The falling rupee has also failed to increase the country's exports, which have been stagnant for the last two years.
The consistent depreciation of the local currency against green bank is also contributing factor to inflationary pressures. Rupee's devaluation is fuelling inflation and eroding the purchasing power of the people belonging to the middle class. Soaring prices of essential commodities including foodstuff have made the lives of the poor and the lower middle class increasingly difficult, as they are struggling to meet the minimum standards of living.