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Unusual decline may widen the trade gap

Sep 25 - Oct 01, 2000

The unusual drop in rupee value declining from Rs54.90 to an all time low at Rs59.25 against dollar in the inter-bank foreign exchange market is likely to hit country's balance of trade if the trend continues to prevail.

Another major concern is the unusual increase in international oil prices which has already added a quantum jump in our oil import bill cross the limit of $3 billion during the current financial year while a 10-12 per cent devaluation during the current year may further aggravate the situation.

There were mix feelings in the market about the intervention of State Bank of Pakistan (SBP), in the inter-bank market to bring in some stability to the weakening rupee. The SBP intervened twice last week and pumped over $35 million to ease the situation yet for how long it will be possible for SBP to keep on its intervention policy in the face of limited reserves seems to be a pertinent question.

According to a report, higher corporate demand and repatriation by some Foreign investors however have reportedly resulted in an out flow of $25-30 million from the inter bank market.

PAGE asked a few questions from some of the leading foreign exchange dealers to identify the factors leading rupee to a new low.

Owais Kalia: Actually speaking, the demand of the dollar has not increased suddenly. This is persisting in the market for the last couple of months. Mostly the open markets are usually affected by any major economic move taken by the government or any important news relating to the economy. Same case happened here. One of the main reasons following an abnormal increase in the price of the dollar against the rupee is the showing of firm confidence in the SBP's policy of intervention in the forex market by the IMF delegation that was in Pakistan on a special mission this week. They said that the steps taken by the apex bank are very positive and these measures are certainly going to have an important bearing on the economy. These comments uplifted the confidence of the investors who were quiet and sidelines waiting for some positive changes in the market. These news resulted in hectic demand of the dollar in the open market by the investors via the banks while the supply fell short that automatically led the dollar to touch the Rs60 barrier, an unusual rise in the price. Moreover speculative buying of the dollar also started as the individuals keeping in view the rising trend took interest in the buying of the dollar again resulting an increase in the demand of the dollar.

Asked to comment on SBP intervention to bring in stability. Whether such steps can bring genuine stability?

Owais said "Yes the intervention of the SBP by selling $35 million in the market is a temporary arrangement to control the foreign exchange market and the further down fall in the value of the rupee. Actually speaking, the rupee can be stabilized only when some positive and long term planning is done. The free forces of demand and supply mainly control the forex market. As a general economic rule, when the demand of a commodity is fairly high as compared to its supply, its price goes up. It is the case with the dollar Vs rupee. Supply of the dollar in the market is falling short of its rising demand so steps are to be taken to ensure the continuous, smooth and steady supply of the dollar into the country. Only then the rupee would be able to stabilize itself against the dollar. In this connection, the following steps would be helpful:

By increasing the GDP along with GNP:

The confidence of the exporters has to be rebuilt to encourage them to bring their export proceeds into the country.

Increase the productive capacity of the existing and sick units so that more output can be obtain and thus exports can be increased.

Expansion of the export base by promoting non-traditional items to earn more foreign exchange.

Rebuilding the confidence of the overseas Pakistanis and encourage them to remit the forex to Pakistan.

Restrict the imports of all those items that are produced internally so that the foreign exchange can be saved and the foreign debt obligations can be met timely.

Sizeable reduction in non-development expenditures.

Last but not the least, to fully exploit software market, which is right now a trillion-dollar world market by increasing our export in software from a meagre amount of $40 million.

All these steps mainly direct towards the continuous supply of the dollar in the form of inflow of the dollar into the country through various sources.

Is the uncertain economic conditions have anything to do with the rise in demand of dollar as the investors feel safer to invest in dollar than other sectors.

Owais said, "Well, the uncertainty factor has been a major drawback for the economic development of our country. The individuals due to comparatively less uncertainty usually prefer investments in the foreign exchange market. But this is not valid under the prevailing market conditions. Since the fluctuations in the foreign currencies under normal conditions are not espied to a great level, that is why the people prefer to invest but for long term. The people know that they have ready cash which can be used at the time of their use without involving into any type of formal legal complexities as quick and efficient service is available to them by the foreign exchange dealers. Since the profit margin in most of the currencies is not very high, so instead of short term, people usually prefer to invest for long term so that they can get a lucrative return to their investments. But under the present conditions, many individuals have earned supernormal profits due to the continuous rise in the value of the dollar.