CHANCES OF FURTHER DECLINE VISIBLE

KANWAL SALEEM
(feedback@pgeconomist.com)

Jan 2 - 8, 20
12

The Pakistani rupee hit a record low of 90.03 last week on increased payments for imports and dealers expected the pressure to continue because of a widening current account deficit.

The rupee ended at 89.95/90 to a dollar, weaker than last Monday's close of 89.39/44.

Currency dealers said: "The sentiment is quite negative and the rupee is likely to depreciate further."

The country's current account deficit stood at $2.104 billion in July-Nov compared with $589 million in the same period a year earlier. The deficit is likely to widen further in coming months because of debt repayments and a lack of external aid.

The government has to begin repayments on an $8 billion IMF loan in early 2012, and without additional sources of revenue, its foreign exchange reserves may come under pressure, analysts said.

The government has to make a repayment of more than $1.1 billion in the second half of 2011/12 fiscal year.

Foreign exchange reserves were at $16.66 billion in the week ending December 16, compared with a record $18.31 billion as of July 30.

Financial experts told PAGE the signing of a bilateral currency swap agreement between Pakistan and China on Friday last slightly improved sentiment.

According to them, this agreement is positive sign, as it would help promote trade between the two countries apart from strengthening their economic ties. The bilateral currency swap agreement is of 10 billion Chinese yuan ($1.58billion) for 140 billion rupees ($1.57 billion) and would end in three years.

Pakistani rupee has come under considerable pressure against US dollar on account of more than expected weakness in the current account while, financial account has also failed to provide any support.

Analysts said their initial assessment of rupee depreciating by 4-5 per cent against the US dollar in FY 2012, had turned out to be on the lower side. Incorporating the recent developments that is more than expected, weakness in the current account (due to adverse commodity price shock), strained finance account (reduce FDI, outflow in portfolio investment and debt repayments particularly, towards 2nd half FY 2012).

They feared that Pak rupee would depreciate by 7-per cent in FY 2012 to close the year around the levels of rupee 92 per dollar in June 2012. This is in line with last 20-yrs (FY91-11) average depreciation of 7.1 per cent, while it is above the last 10-years average of 4.1 per cent, the analysts said.

With the dollar dominated revenue stream, financial experts expect oil and gas sector to benefit from the prevailing phenomenon.

Within the sector, Pakistan Oilfields Limited (POL), stands out to be the chief beneficiary on account of higher portion of oil in its revenue mix, while positive impact on PPL remains on the lower side.

Similarly, IPPs' return on equity component is indexed to rupee-dollar parity and thus, rupee depreciation would yield positively for listed IPP sector.

Furthermore, Pakistan's textile exports would yield better returns in absolute terms benefiting export oriented companies.

For oil marketing companies, they said, the sector would enjoy higher absolute margins on deregulated products like furnace oil rendering into improved gross margins.

For refinery sector, rupee depreciation would render into higher deemed duty in absolute terms.

However, for both the sectors exchange losses on account of higher reliance on imports will offset the incremental benefit. After continuous rise in Japanese Yen, rupee deprecation would further increase the import bill for auto assemblers, thus, adversely impacting the sector gross margins.

For fertilizer sector, rupee devaluation will have no major impact on urea manufacturers since, local urea prices are at approximately 35 per cent down and primarily a function of local gas prices and curtailment.

For producers, having DAP in their product mix (FFBL), the devaluation would slightly augment its profitability, given higher cost on imported phosacid will be more than compensated, by the gain on DAP prices.

According to the businesspersons, devaluation with its implications will cause a contraction in economic activity and consequential slide in income tax receipts will raise the burden of foreign debt overnight.

They said: "Devaluation will make Pakistan lose heavily both as seller and as a buyer and will make no good substitute for remedial changes in economic policies and developmental planning. We should try to effectively utilize the human resources, which is abundant in Pakistan and is under-utilized."

They said cut in government expenditure, improvement in budget and trade deficit, multiple and persistent exchange rate would also be of great help. Devaluation is not an enduring way to improve the economy. Unless the government revises its method of economic planning and execution of plans, no amount of devaluation will stabilize the external value of our currency.

They called for according top priority to the consolidation of our economy vis-a-vis expansion. A strong discipline should be exercised over all the unproductive expenditure whether it is in public or private sector. Business community needs to be facilitated by the government playing the role as a facilitator in true sense.