Aug 13 - 19, 20

Pakistani rupee is already down 5% since January. The rupee closed at Rs85.97 to a dollar on June 30, 2011, while it has depreciated by almost 9% during the fiscal year ended on June 30, 2012. The rupee is presently being traded at around Rs95 to a dollar in the open market and at around Rs94 in the interbank market. During the four years of coalition government led by former Prime Minister Yousuf Raza Gilani, the rupee registered 46% decline since March 25, 2008 when it was traded at Rs62.61 to a dollar. The rupee depreciation is attributed to the erosion of foreign exchange reserves, drying up of foreign investments, no inflow of loans from international donor agencies and a widening trade deficit. The analysts believe that weak economic fundamentals and slowdown in foreign investment has actually brought the rupee under pressure.

The persistent depreciation of rupee is likely to fuel inflation, which remained in double-digits for the consecutive fifth year. The double digit inflation has not only hit the poor hardest but it has also affected all segments of the economy.

The Consumer Price Index (CPI) inflation rose by 11.26% in June from a year earlier, according to the Pakistan Bureau of Statistics (PBS). The CPI rose 0.04% from May on a month-on-month basis.

The poor and the lower middle class find it increasingly difficult to make both ends meet with soaring prices of essential commodities including foodstuff. The poor are highly sensitive to the price changes in food, particularly staple food items. Households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children's education. Single-digit inflation provides the central bank a cushion to slash its benchmark interest rate, which is still in double digits, to spur economic growth. The country's central bank in June for the fourth time kept its key policy rate unchanged at 12% since cutting it by 150 basis points to 12% on October 8, 2011. Soaring inflation has not only raised the credit price but also weakened the purchasing power of the people. The experts argue that higher discount rate and inflation is positively related. However, the solution lies to bring down food inflation with augmenting the supply of food, improving governance and distribution networks.

The growth of per capita income depends upon stability of the exchange rate. The country' per capita income, calculated on the basis of an exchange rate of Rs61.30 to a US dollar, increased from $926 to $1,085 in the fiscal year 2007-08. The currency's strength against the US dollar was instrumental to push up the per capita income in the year 2007-08. With a population growth at 1.9 per cent per annum, the country's real GDP growth of less than 2 percent indicated a negative growth in per capita income in the fiscal year 2008-09. Presently rupee has depreciated to around Rs94 to a dollar, which means negative growth in per capita income.

Devaluation of rupee against all major international currencies is the reflection of weakness of the economy, according to the analysts. The rupee had been stable since the government received the first loan tranche of $3.1 billion sanctioned by the IMF in November 2008, but increased demand for dollar by importers over the past four years has taken its toll on rupee's health. Under former government of Prime Minister Shaukat Aziz, the foreign exchange rates witnessed stability and the rupee did not lose its value against the US dollar and remained at Rs.61 to a dollar, which is presently valued at Rs.94 to a dollar.

The decline in exports is also witnessed in terms of rupee despite the fact that the massive depreciation of the rupee against the US dollar in last fiscal year. This shows that the depreciation did not support Pakistani commodities to penetrate in the international markets. Local textile makers are concerned over the continuous depreciation of the rupee that has increased production cost of export goods, making their products uncompetitive in the world market. The rupee slide has made the imports particularly the oil imports, costlier. The government raised fuel prices from due to depreciation of the rupee, though price of oil in the international market was relatively stable.

Non-intervention of the country's central bank in the market operations denotes that the central bank has allowed the rupee to slide against the greenback in a move to boost exports. The gains on export front however will be short term in a country where export-oriented industries heavily depend on imported raw materials.

Increased remittances from Pakistanis working abroad supported the rupee and shielding the currency from a sharp fall but the increased dollar demand continued to push the rupee lower. The country surpassed the target of $12 billion in remittances during the last fiscal year that ended on June 30. Overseas Pakistani workers remitted a record amount of $13,186.58 million during the last fiscal year, showing an impressive growth of 17.73% when compared with $11,200.97 million received during the preceding fiscal year 2010-11.

Last month, Moody’s downgraded the country's bonds from B3 to Caa1 highlighting weak government finances, structural inflationary pressures and domestic political uncertainties adding to Pakistan's external vulnerabilities and debt sustainability, compounding the downward pressure on sovereign creditworthiness. Critics say that Moody’s has not taken into account the recent improvements in the country's relations with Washington, which would have positive impact on the country's economy. Moody highlighted weak government finances, structural inflationary pressures and domestic political uncertainties are adding to Pakistan's external vulnerabilities and debt sustainability, compounding the downward pressure on sovereign creditworthiness.

The Moody’s has warned that it has no intention of revising Pakistan's rating upwards anytime soon. Some local analysts believe that the downgrading of the country's sovereign credit rating by Moody’s is likely to add to the pressure on the Pakistani rupee, which is already down 5% since January. Moody’s also downgraded the foreign-currency deposit ratings of the top five banks- Allied Bank Limited, Habib Bank Ltd, Muslim Commercial Bank Limited, National Bank of Pakistan and United Bank Ltd.- by two notches to Caa2, from B3, to reflect the lowering of the foreign-currency deposit ceiling in Pakistan, which is the highest rating that can be assigned to a foreign-currency deposit obligation of a domestic bank.