PAK RUPEE DEPRECIATION POSING MANIFOLD CHALLENGES TO THE COUNTRY'S ECONOMY
Aug 13 - 19, 2012
The constant depreciation in Pak rupee worth versus the greenback is not only posing manifold challenges to the country's economy but also contributing to inflationary pressure.
"The decline in exchange rate value of the Pak rupee makes imports expensive. In situations where the higher cost is passed on to the consumers, it would contribute to inflationary pressures and general price rise," experts said.
The Pak rupee had touched a record low of 94.50 against the dollar on August 9. The rupee is constantly under pressure mainly due to the increasing oil imports, lack of foreign investment and repayments to the International Monetary Fund (IMF).
The Pakistani currency's journey to new peaks has created alarming situation, the rupee may touch even Rs 100 mark against the US dollar if balance of payment situation is not improved. the government has projected a current account deficit of $4.8 billion for next fiscal year which is also exerting pressure on the local currency against other currencies. The data shows that the exchange rate averaged Rs 87.32 in first half of the current fiscal year, Ist half FY12, but rose up to Rs 91.29 in second half of the fiscal, 2nd half FY12, recording an average increase of 5 percent.
Financial experts attribute decline to high oil prices and strained US-Pak relations, resulting in discontinuation of aid and suspension of disbursements of payments under the Coalition Support Fund. The 2nd half FY12 also witnessed depletion of forex reserves, widening of balance of payments deficit and the relative behavior of prices in different countries as the major causes of exchange rate decline.
The only factor which supported balance of payment throughout the year remained the remittances. During eleven months of fiscal year12, remittances from overseas Pakistanis jumped by 25 percent to $12.069 billion. The inflow of remittances has also supported the foreign exchange reserves of the country which remain above $16 billion till May 2012 but have started falling in June. Any decline in the remittances at this critical point may jeopardize the BoP position of Pakistan and may dent foreign reserves situation.
Pakistan is also paying back to the IMF with three tranches of $1.2 billion and other debt obligations around $1.7 billion made by the government. The outflow of dollars, debt servicing, has depleted liquid reserves. The country is bound to repay $1.53 billion to the IMF in the upcoming fiscal year, FY13, which will further exert pressure on the rupee.
The major problems of country's economy are the result of increasing inflation, constant depreciation of the rupee against the dollar, mismanagement, corruption and bad governance. Due to critical energy crisis, Pakistani industry is almost facing a total collapse. Unemployment is increasing drastically. Unfortunately, the Pakistani industry is facing the worst of its crises due to the shortage of electricity.
Pak rupee has depreciated by 9.1% during FY12, stirring nervousness among investors about its negative impact on cement manufacturers' profitability due to rising cost of (imported) coal which constitutes nearly 50% of the production cost.
FALLING RUPEE TO JACK UP COST OF PRODUCTION FOR ALL PLAYERS
Generally cement manufacturers are negatively impacted by depreciating rupee on account of imported coal, which constitutes nearly 50% of production costs. As a result of falling rupee the cost of imported coal rises, which squeezes the margins of cement manufacturers. This is especially negative for small cement manufacturers e.g. Al-Abbas Cement, Dandot Cement, Dewan Cement and Gharibwal Cement with minimal portion of exports sales in total revenue.
Pak rupee devaluation positive for Lucky and DGKC as exports more than compensate for rising coal costs. Owing to considerable share of exports in Lucky (35% volumetric sales) and DGKC (30% volumetric sales), both cement manufacturers should gain from depreciating Pak Rupee, contrary to the market estimates.
Weakening of Rupee would benefit both OMCs and refineries in terms of higher absolute margins on products like furnace oil and higher absolute deemed duty respectively. However, as major portion of oil is imported, increase in exchange loss would largely offset this impact.
On the other hand, the local fertiliser sector (especially urea) would be one of the sectors which remain immune from exchange rate fluctuation. With no component being imported and no probability of its export, local fertiliser sector has received no major impact of recent Rupee depreciation. Though it would further augment the cost of imported urea, government would keep its import plan intact as part of populist measures. DAP and NP prices are directly linked to international prices, thus Pak rupee devaluation will lead to marginally higher DAP and consequently NP/NPK prices in the country.
Since Pakistan realised over 60% of its exports from textiles and clothing, experts believe mega size companies having in-house power generation facilities and enjoying synergy are likely to benefit.
Cotton prices have declined by 34%YoY during (July-March) period in the local and 26.4%YoY in the international markets. Recovery in margins is expected as cotton is available at low price coupled with revised international trading contracts. Global cotton production is estimated around 123 million bales, up 5.7%YoY. However, during FY13 cotton production is likely to plunge to 116 million bales which is same as FY11 production. Despite the estimated decline in production, nearly 67 million bales carry forward stock for FY13 will keep the priceat modest level in the international markets.
During financial year 2011-12 export of textiles and clothing declined by 10% to US$10 billion, mainly due to decline in quantity of different textile products but also because of reduction in cotton prices. With the major share in total textile export, cotton cloth segment exports declined by 15.4%YoY during July-April. Moreover, other textile segments knitwear, bed wear and readymade garments, were also down by 26%YoY, 20%YoY and 27%YoY respectively.
The ongoing energy crisis can be termed as 'mother of all evils'. Over the years Pakistan's external debt has been increasing. On one hand it is eroding country's foreign exchange reserves and on the other hand, debt servicing is becoming unsustainable, depreciating Rupee adds to the woes. If inflows don't improve Pakistan will be forced to once again approach the lender of the last resort. If this becomes unavoidable further hike in electricity and gas tariffs, upward move in interest rate and withdrawal of some of the subsidies, will fuel inflation in the country. Pakistani exporters are already experiencing erosion in competitiveness and further hike in inflation rate will certainly bode well for them as well as for the country.
In this situation, solution lies in ensuring tight financial discipline, good management at all levels, improving weak economic fundamentals, curtailing current account deficit and halting excessive government borrowing from the central bank and other sources.