decline may widen the trade gap
By AMANULLAH BASHAR
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
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
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.