TONING DOWN DEVALUATION IMPACT

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)

Jan 2 - 8, 20
12

A country like Pakistan that is so much dependent on imports of various essential items, without local substitutes thus far, has to endure severe impact on its economy depreciation of its currency against the US dollar.

Only in last six months (June-Dec), Pak rupee has lost approximately 10 per cent value against the US Dollar. During this period, the lowest rate dollar traded was Rs82 on Nov 10 and the highest Rs90.3 on Dec 21. The average parity was Rs87.2 per dollar in half of last calendar year.

It is said the state bank of Pakistan (SBP) intervenes in exchange rate policy to keep the value of exports higher or so to say for making Pak rupee 'competitive in relation to regional currencies'.

Exporters rake in good profits in case of devaluation of rupees against other currencies. But, when the competing economies also fall in line to US dollar and offer highly competitive prices, the Pakistani exporters lose international market share.

CURRENCY MANIPULATION

India, one of the Asia's emerging economies, has also seen consistent decline in its rupee value a dollar. In September last, it had breached the Rs50 per dollar level, said to be the weakest since May 2009. As of July, a dollar was trading 44-mark. Analysts attributed an approximately 14.6 per cent decline in rupee previous year-Indian rupee was the Asia's worst performer in 2011-to Euro zone crisis, however there are reports doing round about the manipulation in currency.

As usual, exporters are the winner and current account imbalance was a consequence. In Indian economy, IT exporters who ring up more than 80 per cent of their revenue of $70 billion from global outsourcing are rejoicing at exchange rate benefits-more amount per dollar.

Sri Lanka also brought down its rupee value against a dollar by three per cent from November last to make up for the Euro crisis-driven slump in export demand. Its rupee slid to 110 per dollar. President Mahinda Rajapaksa announced depreciation as 'an incentive to exports'. It may be noted that inflation was not at problematic level in Sri Lanka and nor its debts did take any impact of currency depression. Decreasing inflation to have touched 5.1 per cent in October gave its central bank a leeway to fine-tune its currency policy. In a strong compensation, notably, the Sinhalese government made custom duties on yarn null and void and lifted value-added tax on import of textile equipments.

TAKING A HEAVY TOLL ON EXTERNAL SECTOR

While dollar advancement is beneficial for the export sector, it takes a heavy toll on imports back in Pakistan-overall current account position and price of consumer goods.

Total imports during July-Nov 2011 amounted to Rs1,601,641 million, showing 21.79 per cent increase compared with Rs1,315,099 in Jul-Nov 2010, according to the provisional data released by the federal bureau of statistics. The trade deficit in this period stood at Rs787,103 million.

Food imports totalled at Rs184,911 million, up a minuscule 0.16 per cent from Rs184.624 million. In all food items imported in the country during the first five months of this fiscal 2011-12, palm oil registered the highest increment in import bill both in rupees (42.34 per cent) and in dollars (40.58 per cent) terms, although quantity-wise the rise was only 4.64 per cent. Pakistan paid Rs90,004 million for 887,965 million tons of palm oil in July-Nov FY12 compared with Rs63,233 million for 848,558 million tons in July-Nov FY11. The edible oil caused departure of more than one billion dollar foreign exchange in five months, the highest in food group. Dollars spend on food was more than the import bill of machineries including power generation, textile, and agriculture machineries.

Petroleum products that carry heavy weight in total imports had to incur additional cost due to devaluation of Pak rupee in the period under review. The country imported 2,576,098 million tons petroleum crude, a straight 19 per cent drop from 3,209,576 million tons earlier. However, it had to pay 20.67 per cent more in rupees (Rs180,034 million against Rs149,197 million) and 19 per cent in dollars ($2 billion versus $1.7 billion) terms. Imports of petroleum products amounted to Rs366,799 million in contrast to Rs213,815 million, up 72 per cent with their quantity inching up 24.13 per cent.

Staggering trade deficits led to astronomical climb in the current account deficit of 257 per cent to two billion dollar in July-Nov. There was a surplus of $589 million in current account earlier. This is exerting pressure on foreign reserves.

The current account imbalance was in spite of the substantial growth in remittances. SBP has recorded 18 per cent surge in remittances in July-Nov to $5.24 billion as against $4.43 billion remitted by overseas Pakistanis in the similar period previously.

Needless to mention the stimulating impact currency devaluation has on debt servicing. Understandably, it pushes up the cost of debt installments.

LOCAL PRICES

Rising import bills cause upswing in the domestic prices. Exogenous transfer of price inflation disturbs the standards of living of people, though endogenous problems are the main reason behind price inflation. Fiscal gap, shortage of commodities, etc. are the prime factors. However, impact of rise in international oil prices is evident all through the roster of local goods and services. At present, administrative issues drive the price hike of consumer products.

Inefficient price control mechanism gives birth to abnormal price disparity. The authorities have failed to stop profiteering and hoardings at all levels. Controlling such unfair practices can bring down local prices.

Heavy rainfalls in 2011 have damaged several major and minor crops. In Sindh that has recorded the heaviest downpour in the country, crops of onions, chillies, tomato, and other vegetable were adversely affected. The government has to import greens to overcome shortage.

Experts said the government ought to look for import substitutions to prevent fallouts of global price storms and currency depreciation on the domestic market. The government should tap revenue sources to shed its reliance on custom duties on imports for value-added sector that can rev up growth.