THE NATIONAL CURRENCY UNDER STRESS
SYED NABEEL IQBAL
Manager Marketing & Research/CISO
Khanani & Kalia International (Pvt) Ltd.
Sep 8 - 14, 2008
Year 2008 has proved to be one of the most stressful years for Pakistanís rupee so far and the currency has touched record lows not only against the US dollar but against the euro, pound sterling and UAE Dirham as well. With special reference to Pakistanís sliding economic performance and overall situation of the country, Pakistanís rupee has found it extremely difficult to sustain at a reasonable level during 2008.
Some of our opinion leaders argue that why there has been a sudden free fall of rupee and why any corrective measures have not proved very successful so far. It is necessary to understand that the current fall of rupee has not been 'sudden'. Rather there was a pressure building up on rupee for sometime on the basis of certain factors which were related to Pakistan's changing political, economical and security situations.
Starting from judges' movement in February 2007 to Ms. Benazir Bhutto's assassination in Dec 2007 including the tragic incidents of 12th May in Karachi and declaration of emergency in November, end to elected government's tenure and the taking over of interim set up; Pakistanís politics and economics had actually started to wobble by the time. The declaration of emergency in November was yet another reason for the international investors to raise their eye brows on the future of their investments.
The negative trend in the real economic growth as a result of all these major factors added fuel to fire to the forex coffer of the country. The fiscal year 2007-08 ending with net outflow from the portfolio investment left a big negative mark on the country's vulnerable economic and political situation causing a total outflow of $4.6882 billion from the market. This negative situation prevailed throughout the fiscal year, which was contrary to the last fiscal year when the portfolio investment added about $1.9 billion to the total foreign private investment. Political uncertainty which started with emergency, heightened with the murder of Benazir Bhutto and continued with the results of general elections stood as the biggest threat to the inflow of investments during the whole fiscal year.
Another disturbing factor for the economy was a consistent increase in overall imports which badly hurt the current account balance and hence the trade deficit. The import figure totaled $39.97 million in the last fiscal year leaving a trade deficit of $19.7 billion, whereas the current account deficit stood at over $14 billion. The twin deficits compounded economic woes of the government and ate in to the hard-earned foreign exchange of the country. The demand for imported goods continued to rise in Pakistan as items which were previously considered luxuries are now deemed to be necessities by those belonging to the affluent classes. The rising demand for imported goods, particularly items like luxury cars and mobile phones, is eating away a significant part of country's forex reserves.
The abnormal increase in the international oil prices was yet another major factor for pushing back Pakistanís economy and ultimately the national currency. The nation buys as much as 85 percent of its oil overseas. According to a news source, Pakistanís total POL imports are worth $11.3 billion comprising of both refined and crude products, whereas $2.2 billion worth of refined diesel is imported from various sources.
The shortage of electricity and gas within the country shocked not only the general public but the industrial sector suffered even more badly that has resulted in shutting down some of them.
As a result of all these external pressures, the rupee has suffered from record lows and has depreciated above 20% during the first six months of 2008. Rupee started the new year trading at Rs. 61/40 as against its price Rs. 75/40 on 28th August and hence have shown a negative slide by Rs. 14 which is the biggest loss that the national currency has ever suffered in such a short span of time. The basic technical factor that spurred rupee's fall was in fact the short supply of dollars in the inter bank as well as the open market. The demand was extremely high whereas the supply to cover it up was fairly low which naturally created a pressure on the exchange rate. The common factor in every situation was high volume buying either from importers, oil companies, corporate payments, outward remitters and individuals whereas the liquidity position of the market was never under control to give an appropriate cover.
As far as the State Bank of Pakistan is concerned, being the regulatory authority it has always been into the market and has been taking all necessary measures to control the depreciation of rupee. The first crisis seen in May 2008 saw central bank putting restrictions on the exchange companies which later on was followed by restricting banks in June í08. Despite the compliance of all the new regulations, the exchange rate unfortunately did not come under control. Realistically speaking, the major reason for not achieving the desired results is the hardcore fact that the inflows are not improving which may support not only the State Bank but overall financial system to run. The State Bank's physical intervention is there specially in the form of meeting 100% payment requirements of the oil companies but that too is already putting a lot of pressure on the country's foreign exchange reserves and hence this strategy alone may not help the cause for a longer period of time.
It is worth noting that despite of a new elected government in February '08, the strategic focus required to control the value of rupee and hence the economy overall is somewhat missing. Political instability still prevails and forex inflows in the country are well below the requirement of the economy. Now the time has come that the government through its Finance ministry should start seriously thinking over the grave situation of the economy and formulate a comprehensive plan which should address the real problems of the economy otherwise it will be perhaps too late.
Strategic focus through setting new targets, making and implementation of policies, aggressive diplomatic moves; is required to control the depreciation of rupee and improve the supply side through increasing exports and cutting of imports, restore the confidence of international investors so that they can invest in our capital markets as well promote foreign direct investment in strategic business plans and last but not the least, bring political stability so that these moves today can give long term results so very important for the country in the current situation.