CONTINUOUS APPRECIATION IN US DOLLAR VALUE AGAINST PAKISTANI RUPEE

SYED FAZL-E-HAIDER
Oct 12 - 18, 2009

Presently, the rising demand for US dollars has made the Pakistani rupee unable to stand firm against greenback. The rupee is presently being traded in the inter-bank market at over 83 per dollar, to a record low of around Rs83.55 last October. The rupee has depreciated against the dollar by about a third in the last 20 months and continues to dwindle.

Though, the country's foreign exchange reserves, according to the State Bank of Pakistan (SBP), rose to $14.49 billion in the week ended on September 26, yet the rupee failed to make any recovery against dollar due to higher demand. The import bills are becoming costlier day by day and it seems that the rupee may face hard days, and lose its value further. The continuous appreciation in dollar value has so far pushed up the country's debt by over Rs200 billion during the last seven months.

Analysts fear that weakening rupee would create problems in recovery of the economy.

Pakistani rupee is likely to witness massive depreciation against US dollar amid increasing dollar demand by the private sector, which has taken the responsibility to pay 50 per cent of the country's oil import bill from August 1. The currency dealers however believe that the exchange rate may see stability despite higher dollar buying by the private sector if the remittances remain on the higher side and inflows of dollars from the International Monetary Fund (IMF) continue in the local market. The country witnessed a surge in overseas borrowings in the last fiscal year 2008-09 after it secured a $7.6 billion credit line from the IMF in November to avert a balance of payments crisis and shore up reserves.

Islamabad has also requested about $4 billion in additional financing from the IMF as 'insurance' against the economic crisis.

Last year, the country's central bank had taken charge of paying oil bills to protect the exchange rate from speculative forces after rapid devaluation of rupee against the dollar. Under an agreement with the IMF, the central bank is gradually shifting the responsibility of oil import bill payment to private sector. The country meets 80 percent of its fuel requirements through oil imports. The country's foreign reserves had hit a record high of $16.5 billion in October 2007 but fell steadily to $3.45 billion by last November, largely because of a soaring import bill.

Local currency dropped the most in last three months as higher prices for commodity imports and payments on overseas borrowings boosted demand for dollars. Analysts believe that the market will see aggressive dollar buying during the current year and that will escalate the price of the US currency. The dollar buying will surely involve speculative forces, which would create some destabilization but it could be checked with higher inflows.

Weakening rupee value is also a contributing factor for inflation. The poor and the lower middle class find it increasingly difficult to make both ends meet with soaring prices of essential commodities including foodstuff. The poor are highly sensitive to the price changes in food, particularly staple food items. Households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children's education.

The growth of per capita income depends upon stability of the exchange rate. The country' per capita income, calculated on the basis of an exchange rate of Rs61.30 to a US dollar, increased from $926 to $1,085 in the fiscal year 2007-08. The currency's strength against the US dollar was instrumental to push up the per capita income in the year 2007-08. With a population growth at 1.9 per cent per annum, the country's real GDP growth of less than 2 per cent indicated a negative growth in per capita income in the last fiscal year 2008-09. The rupee dropped from Rs60 a dollar to Rs80 just in a few months in 2008-09.

Devaluation of rupee against all major international currencies is the reflection of weakness of the economy, according to the analysts. The rupee had been stable since the government received the first loan tranche of $3.1 billion sanctioned by the IMF in November, but increased demand for dollar by importers recently has taken its toll on rupee's health.

Under former government of Prime Minister Shaukat Aziz, the foreign exchange rates witnessed stability and the rupee did not lose its value against the US dollar and remained at Rs.61 to a dollar, which is presently valued at Rs.83 to a dollar.

Depreciating rupee benefits the country's hardboiled capitalists who make money by selling cheap exports, but it hurts the middle class raising taxes in the middle of the financial crisis.

Critics say that additional IMF loan would further enhance the country's debt servicing obligations, thereby squeezing the resources meant for developmental projects. The $5.28 billion aid pledges, Islamabad received from international donors at the meeting of friends of Pakistan meeting held in Tokyo on April 19, would further push up the country's external debt burden from the current level of $50.9 billion to $56 billion. It would be difficult for the country to repay the massive external debt with the current GDP growth of two percent in last fiscal, slowest in ten years and a current account deficit, which has not yet been reduced to a sustainable level, according to the critics.

The rising current account deficit has compelled the government for fresh borrowings from internal and external sources. Foreign debt as per ratio of GDP also rose to 31 percent during last fiscal year, as at present GDP stands at $162.5 billion. Major increase has been witnessed in the IMF debts, which went up by 285 percent, to $5.148 billion, from $1.337 billion by the end of last fiscal year due to the standby loan of $7.6 billion approved in November.

The country's economy has taken a hit from the global recession that eroded exports and Taliban-led insurgency in the country's northwest that dried up foreign investments and brought the growth to a near halt. The ongoing fight against Islamist extremists in the country's northwest as well as uncertainties created by the slump in global demand and domestic power shortages add to the challenge of pulling the economy out of an extended phase of sluggish activity. The analysts believe that the economic growth revival largely hinges on the performance of the manufacturing sector and security environment in the country, which is currently at war with Taliban insurgents.