RUPEE - DOLLAR PARITY

MULTIPLE EFFECTS ON THE ECONOMY

AMANULLAH BASHAR
Oct 12 - 18, 2009

On the back of exchange rate depreciation PKR continues to dip against dollar having a widespread impact both positive and negative in certain areas, however the import based industries are suffering the pinch more as compared to others. The shockwaves of the rupee depreciation against dollar are being felt more severely by the people in terms of ever rising price inflation and fast eroding purchasing power.

The rupee would have gone steeply low had our foreign exchange reserves been not given a stabilization dose in the recent months. Currently our reserves are over $14 billion which are of vital importance to check further decline in rupee value against dollar. There are severe criticism going on against government's efforts to streamline foreign flows of dollars especially from IMF, USA and the friends of Pakistan. In fact in the face of stagnant economic performance the managers at the helm of affairs had no option to run from pillar to post to give a respectable look to our foreign exchange reserves, otherwise the rupee may have crossed 100 against a dollar.

However, the adverse impact of declining rupee is still there which is depicted from power generating sector that heavily depends on imported fuel oil. Consequently, the price of electricity is also on the rise. It is the high cost of electricity which is adding to the cost of production of the manufacturing sector in general. The textile and cement industries which are both considered as export oriented industries have to face the music due to ever rising electricity prices.

CEMENT INDUSTRY

The cement manufacturers are concerned over risks to their exports in the days to come in view of rising cost of production in Pakistan as compared to other countries in the region.

It may be noted, that Pakistan's current cement exports to Middle East & Africa estimated around 7.51 million tons, but they feel that they would not be able to repeat their export performance due to ever rising competition in the export market especially following the re-entry of Saudi Arabia into the export market.

It is interesting to note that Kingdom of Saudi Arabia (KSA) is one of the lowest cost producers in the region due to subsidized energy and fuel, high net cash positions, and low debt servicing cost due to low interest rates.

According to an estimate, Saudi production cost of cement industry averaged US$28/ton as against US$36/ton for Pakistan. Besides low cost of production Saudi Arabia has location advantage as a supplier to other GCC & African countries as KSA can tap them via mostly land route so freight costs and delivery time are both lower.

In this backdrop the cement manufacturers are expecting a higher degree of competition in the Middle East export from Saudi Arabia. It is worth mentioning that Saudi Arabia's annual cement production capacity is expected to increase from current 44.9 mn tons to 64 mn tons by 2012 and the government has issued 27 licenses for a cumulative 45 million tons capacity addition over the last few years while some of the plants are in feasibility state so final number could change.

HOME REMITTANCES

The dollar-rupee conversion rates are offering a great attraction to overseas Pakistani workers, which is apparently reflected in ever increasing home remittances that could be described as a positive side of the dipping of rupee against dollar.

The latest reports said that Pakistani workers remitted a record amount of $806.12 million in September, 2009 as against $660.35 million in the same month of the last fiscal year (September 2008), showing a jump of $145.77 million or 22.07%. The amount of $806.12 million includes $0.08 million received through encashment and profit earned on Foreign Exchange Bearer Certificates (FEBCs) and Foreign Currency Bearer Certificates (FCBCs).

This is a third consecutive record amount remitted in a single month during the current 2009-10 fiscal year (FY10). The previous highest amount remitted in a single month by Pakistani workers was recorded in August, 2009, when an amount of $780.53 million was received in the country.

During the first quarter (July-Sept.) of FY10, an amount of $2.332 billion was sent home by overseas Pakistanis, showing an impressive 24 percent rise when compared with $1.880 billion received in the same period last year. The amount of $2.332 billion includes $0.74 million received through encashment and profit earned on FEBCs and FCBCs. The monthly average of remittances in the first quarter of FY10 remained at $777.17 million, up 24 percent from $626.62 million in the same quarter last year.

The inflow of remittances in the July-September, 2009 from UAE, USA, Saudi Arabia, GCC countries (including Bahrain, Kuwait, Qatar, and Oman), UK and EU countries amounted to $504.01 million, $498.76 million, $430.75 million, $323.87 million, $235.08 million, and $78.27 million respectively as compared to $312.18 million, $499.65 million, $398.02 million, $315.37 million, $118.57 million and $51.78 million respectively in the July-September, 2008 period. Remittances received from Norway, Switzerland, Australia, Canada, Japan, and other countries in the first quarter of FY10 amounted to $260.02 million as against $184.18 million in the same period last year.

The inflow of remittances into Pakistan from almost all countries of the world increased last month as compared to September, 2008. As per the break up, remittances from USA, UAE, Saudi Arabia, GCC countries, UK, and EU countries amounted to $181.82 million, $179.84 million, $134.31 million, $112.39 million, $86.59 million and $26.15 million, respectively as compared to the corresponding receipts from the respective countries during September 2008, i.e. $179.81 million, $110.73 million, $133.38 million, $108.67 million, $43.75 million and $19.08 million.

Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during September, 2009 amounted to $84.94 million as compared to $64.88 million during September, 2008.

It may be pointed out that the State Bank, Ministry of Finance, and Ministry of Overseas Pakistanis have undertaken a joint initiative called 'Pakistan Remittance Initiative (PRI)' recently with a view to facilitating the flow of remittances through formal channels. This initiative has started to materialize and remittances through formal channels are showing considerable growth.

PAKISTAN'S LIQUID FOREIGN RESERVES POSITION

The total liquid foreign reserves held by the country stood at $ 14,748.8 million on 3rd October, 2009. The break-up of the foreign reserves position is as under: -

i) Foreign reserves held by the State Bank of Pakistan: $ 11,168.1million
ii) Net foreign reserves held by banks (other than SBP): $ 3,580.7 million
iii) Total liquid foreign reserves: $ 14,748.8 million