UNCONTROLLED DECLINE IN RUPEE VALUE
May 17 - 23, 2010
Pakistan's economy, though showing signs of recovery, is still long way to overcome the traumatic effects of global recession.
What surprises one is the fact that no conscious efforts are made by the State Bank or the economic managers to arrest the freefall of Pak rupee vis-‡-vis the currencies that matter most.
The US dollar is not showing any signs of abatement against Pakistan currency. If the exchange rate went up from Rs61 to Rs.80 a dollar during the worst economic period, it was something to be reckoned with, but its further slide to Rs86 a dollar in the wake of much improved economic conditions and reserve position is somewhat inexplicable.
The open market collaboration of banks and exchange dealers sets the exchange rate, which is a risky proposition. The prices of petroleum products may go up any time and thus pushing the exchange rate further up to the detriment of the economy and the common man. SBP should review this mechanism and apply checks and balances to control the banks and exchange dealers who are known for harming the national interest for filthy gains.
Stability of exchange rate is not a trivial issue to be left for the banks and exchange companies to resolve. On this issue hinges the economic future of this country and survival of its people. Timely IMF assistance and a regular and improved flow of foreign remittances pushed back the economy from the brink of disaster.
While debate is on to ascertain the role of remittances in economic development, the fact remains that these remittances are holding the fort in a big way. While being used for bridging the yawning external account gaps, these remittances activate the domestic markets and improve the quality of life of their beneficiaries. The regular dollar inflow through remittances helps maintain exchange rate stability so vital for the betterment of economy. This inflow also supports national savings and domestic investment.
While a devalued rupee acts as an incentive for the foreign remitters and country exports, its impact on import-based poor economies like Pakistan's more than offsets the economic gains. The most hit-hard are the households who draw their income from domestic resources and who do not enjoy the luxury of foreign remittance inflows.
The rupee devaluation puts them under a double squeeze. With their limited monetary resources, they find it difficult to bid for the essential goods in an inflationary market.
Since more than 50 per cent of Pakistan's import bill accounts for consumer goods and raw material for consumer goods, a hugely depreciated rupee pushes the consumer goods prices further up compelling the hapless low income groups to cut on their essential consumption and thus sending them further below the poverty line.
In economic sense, a depreciated currency encourages exports and foreign remittances that bode well for the economy. But, the beneficiaries of the economic fruits are the elite group of exporters and a certain percentage of people benefiting from a regular stream of foreign remittances. The third beneficiary is the government with its improved reserve position. But the common man is the ultimate sufferer who is made to buy the leftover domestic produce at a much higher price, as both quality and quantity of that produce are reserved for export. Rice is one example. Further, relying solely on domestically produced income, he finds himself trapped forever in the quagmire of diminishing purchasing power and rising goods prices.
RUPEE DEPRECIATION (LAST 28 MONTHS)
|MONTH||RE/US$||RE/EURO||RE/UK POUND||RE/ CANADIAN$||RE/UAE DIRHAM|
|Maximum fall in rupee value||36.05%||35.66%||14.4%||35.33%||35.88%|
|Existing fall||34.46 %||23.00%||4.72%||35.33%||34.71%|
After the passage of almost two years, it should not be difficult even for those who insanely contributed to the untimely demise of an economic system, which despite its inherent weaknesses had projected Pakistan as an emergent economy. The frenzy for a change upsets the economic apple cart. The foreign investors fled away. The domestic barons shamelessly and ruthlessly took their dollars away from the country to earn better returns. The economy went on vent. To create a smoke screen, the liquidity and exchange rate pressures are blamed on delayed disbursements from CSF and IMF. Someone has rightly observed that we are the only people who blackmail others by threatening to shoot ourselves. The 5th IMF tranche of $1.2 billion will be released somehow, but what about the repayment that is too around the corner. The Indian rupee has recovered from Rs50 a dollar to Rs45 a dollar during the first three quarters of the current financial year.