DOLLAR VERSUS PAK RUPEE

SHAMSUL GHANI shams_ghani@hotmail.com
Oct 12 - 18, 2009

Almost 40 per cent devaluation of Pak rupee after the much-trumpeted democratic revolution has not only squeezed country's economy but has also tightened the noose around the common person's neck.

The high-ups of the ruling and opposition parties after hushing up the issue of sugar prices are now busy in dissecting the Kerry-Lugar bill. Those who have mercilessly ravaged this country are seen these days making uneducated analyses of the bill in TV reality shows. Being generally devoid of economic and financial acumen, none of the democratic stalwarts appear concerned about the implications of Pak rupee's war against the dollar. Even our economic managers and monetary regulators do not seem concerned about the situation. They even can't give a cogent reason for this uncalled for sliding of rupee in the face of an improving economy and a comparatively better reserves position. They fail to explain how the previous government succeeded in keeping the dollar within a narrow band of 58-62 for almost eight years, and that why they are unable to keep the slide of rupee within a reasonable and manageable limit.

The impact of a weakening rupee on the economy is multi-dimensional with a number of negatives and a few dubious positives. The increased cost of inputs pushes the consumer goods prices to a high that is unmanageable even for the middle class, let alone the lower middle class and below-poverty-line hapless masses. GDP goes up, but so does the external debt liability in rupee terms. Since ours is an import based economy, any benefits enjoyed by the exporters are more than offset by a higher import bill in rupee terms. The higher export proceeds are not in dollar terms. For the exporters too, the gain is not an unmixed blessing; the increased cost of production wipes off most of the gains on proceeds side.

The increase in GDP and GNP is not reflected in per capita GNP in dollar terms. During 2008-09, GNP recorded an increase of 29 per cent, but when seen in dollar terms, the per capita GNP showed a marginal increase of 1.2 per cent. Even this increase becomes unreliable when the GNP is measured against the current exchange rate of Rs.83.3 a dollar.

GNP AND DOLLAR EXCHANGE RATE FOR THE LAST NINE YEARS
YEAR GNP (MILLION
PAK RUPEES)
POPULATION
IN MILLION
PER CAPITA GNP
IN PAK RUPEES
$ EXCHANGE
RATE
PER CAPITA
GNP IN $
2000-01 4,155,391 140.36 29,605 58.44 507
2001-02 4,476,319 143.17 31,266 61.43 509
2002-03 5,027,460 146.75 34,260 58.50 586
2003-04 5,765,058 149.65 38,524 57.57 669
2004-05 6,634,243 152.53 43,495 59.34 733
2005-06 7,773,106 155.37 50,030 59.86 836
2006-07 8,830,638 158.17 55,830 60.63 921
2007-08 10,494,181 160.97 65,193 62.55 1,042
2008-09 13,502,906 163.76 82,455 78.24 1,054

The export side benefits are dubious because of falling rupee, which propels the input cost to higher levels making the manufacturing business quite expensive and thus leaving little room for product competitiveness in the global markets. Higher import costs bring in import based inflation. Energy shortage is a huge drag on the economy. Limited and expensive options like rental power projects do little to move the industrial wheel.

In this scenario, whatever is produced is short on quality and long on production cost. More than halved oil prices have given respite to the economy. The global oil situation is pretty uncertain. The prices can move either way, yet the probability of northwards movement is higher. Unfortunately, we have developed a habit of shrugging off inertia in the midst of a crisis. We are not used to taking timely actions and making anticipatory moves. We got a chance when the oil prices were moving in the band of 32 - 40 dollars a barrel.

We could have made use of forward fixed or option contracts to ensure cheaper crude supply for a certain period. But, we were then busy in settling more important political scores and had little time for mundane economic issues. An upward trend in oil prices will magnify our foreign trade distortions to the detriment of an already weak economy.

FOREIGN TRADE AND CURRENT ACCOUNT POSITION DURING THE LAST FIVE YEARS
BALANCE OF PAYMENT - US $ MILLION 2004-05 2005-06 2006-07 2007-08 2008-09
1. Export f.o.b 14,401 16,388 17,119 20,207 19,212
2. Import f.o.b 18,753 24,647 26,614 35,102 31,668
3. Trade Balance (1-2) (4,352) (8,259) (9,495) (14,895) (12,456)
4. Services Receipts 3,837 4,718 5,239 5,410 4,043
5. Services Payments 9,678 12,022 13,207 15,726 7,325
6. Services Net (4-5) (5,841) (7,304) (7,968) (10,316) (3,282)
7. Workers remittances 4,168 4,600 5,494 6,451 7,811
8. Other Income & Private Unrequited Transfers 4,272 5,314 4,608 4,597 (934)
9. Total Income & Private Unrequited Transfers (7+8) 8,440 9,914 10,102 11,048 6,877
10. Current Account Balance (3+6+9) (1,753) (5,649) (7,361) (14,163) (8,861)

The most damaged single entity of our economy, in consequence of the rupee free fall triggered mainly by the political upheaval, was the stock market. After touching the 16,000 level, the KSE-100 index breached the 5,000 mark to completely shatter the investor confidence. The common small investors, as usual, were the main casualty; yet the avalanche took some stock bigwigs to the ground as well. Foreign portfolio investment vanished within a short period of one year. The omnipresent political uncertainty still deters the foreign portfolio investment from entering our stock market. The depreciated rupee has, however, started to attract foreign buyers, albeit in a very small way.

FOREIGN PORTFOLIO INVESTMENT DURING THE LAST FOUR YEARS (MILLION US$)

Foreign Portfolio Investment Fy-06 FY-07 FY-08 FY-09 Jul-09 Aug-09
Private 352 1,820 19 (510) (4) 65
Public 613 1,468 21 (544) - -