THE 8.5% DEVALUATION OF THE PAK RUPEE

 While it may take months to enhance exports it would cause cost-pushed inflation

 By SHABBIR H. KAZMI
Oct. 26 - Nov 01, 1996

The government has devalued Pak rupee by another 8.5% against the US dollar. This was the third devaluation since October 1995. Depreciating the rupee — by devaluation and downward adjustment of rupee-dollar parity — intermittently has eroded the rupee value by nearly 26% in the last thirteen months.

While it will take months to enhance the exports, all the imported commodities have become expensive immediately. The increase in POL prices by 10% has already started reflecting in increase in freight cost. Alongwith POL, enhancement in excise duty on gas charges by 10% would increase the cost of electricity produced which will be passed on to the consumers. Besides, increase in freight cost will result in increased prices of all the commodities.

Devaluation will have an adverse impact on foreign debt servicing, both repayments and interest charges will increase in terms of rupee — although they will remain constant in terms of dollars, meaning that debt servicing as a percentage of GDP will increase.

Although Pakistan's exports registered an increase of 17% during the first quarter of the current financial year, the average unit price realization (AUP) in terms of dollar has gone down for almost all the products. "Soon after devaluation foreign buyers starts demanding reduction in prices. It may be true that in terms of rupees the net inflow from exports increases but with the decline in AUP the proceeds in terms of dollars are also reduced. The same will happen now as foreign buyers will start demanding reduction in prices, said an exporter of textile products.

Referring to the improvement of balance of payments, one of the leading economits said that reduction in import of plant and machinery is an alarming sign. In all the developing countries, where the expansion of manufacturing base is done according to their priorities, the balance of payments is often negative which goes down with the production of exportable surpluses. Therefore, any deliberate attempt to cut down plant and machinery in Pakistan can result in serious reduction in GDP growth rate of the country.

According to one of the past chairmen of the All Pakistan Textile Mills Association (APTMA) and a leading spinner, since the country does not expect more than 9.2 to 9.5 million bales of cotton this season at least export proceeds from export of raw cotton are out of the question — previously they were estimated at US$ 500 million. Besides, the prices of raw cotton have gone up with the news of reduction in cotton crop estimates and exporters of textile products would not be able to get the real advantage of devaluation.

As against the country's exports, imports have an inelastc demand. Bulk of country's imports are of food items, POL products, chemicals, fertilizers and edible oil.

According to cement industry sources — an industry having very high energy cost as a percentage of cost of production — the export potential of the industry will be lost. The industry has been trying hard to earn export contracts but increase in cost of production has minimised the chances of export of cement from the country.

As regards forex reserves, while the governor of State Bank of Pakistan has offered an attractive rate of return to foreign currency account holders, the banking sector does not expect any substantial increase in deposits. Foreign currency withdrawn from the banks has not gone out of the country.

"The withdrawals from foreign currency accounts may have been due to any other factor but political uncertainty. The rate of return may be higher but all those factors responsible for political uncertainty were not removed" said the country manager of a foreign bank.

In his press briefing, the SBP governor criticized the role of money changers and held them responsible for the speculative buying of dollar. The money changers, however, have a view to the contrary. "It was the money changers who provided dollars to the banks when there were long queues in the banks for withdrawals from foreign currency accounts," said a leading money changer. Apart from this, money changers who are working with proper licences have helped in stabilising the dollar prices in the country.

Average mid-value dollar buying selling prices

  •  Jan              31.8048

  • Feb              31.7770

  • Mar              31.6226

  • Apr              31.6989

  • May             31.8262

  • Jun               32.0217

  • Jul                32.4792

  • Aug              32.5235

  • Sep              32.6685

  • Oct              32.2603

  • Nov             35.6829

  • Dec              35.7285

  • Jan              35.8567

  • Feb             36.6286

  • Mar             36.6460

  • Apr              37.0325

  • May             37.4002

  • Jun              37.8023

  • Jul               37.9427

  • Aug             38.6937

  • Sep              40.1215

  • Oct              41.8556

  • Source: KASB