PAK RUPEE UNDER PRESSURE

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

June 14 - 20, 2010

Pressure from import payments and severe shortage of the greenback in the inter-bank market amid surging demand forced the Pakistani rupee to an all-time closing low and to trade at a record low against the US dollar this week. The rupee hit a record low against the dollar this week in the inter-bank market and traded at record low of over Rs85 to a dollar. The rupee hit a four-month low against the dollar last month to breach Rs85 level amid heavy buying of the greenback for corporate and import payments. The currency dealers expect the rupee slide to continue, as the recovery of dollar on the global markets and its shortage in the inter-bank market could further put pressure on the rupee. Surprisingly, the rupee is depreciating against dollar despite strong foreign exchange reserves and a very low current account deficit, reflecting the inner weakness of the economy. Analysts believe that harsh budgetary measures to boost revenues in next fiscal year 2010-11, starting from July1, could dampen the market activities while consumption level may fall further. They argue that the low consumption squeezes the production capacity of the economy and hits most of its segments. This situation reflects poor economic growth expectations next year which may further weaken the rupee, according to the experts.

Pakistani rupee is persistently buckling under pressure, as the dollar soared to an all time high at Rs85.50 this week. The excessive buying of the greenback by the banks pushed up its demand at inter-bank market against the local currency. The buying worth $200 million is expected by the importers for payments of crude oil, which would further depreciate the rupee, according to the Forex market dealers. The demand for oil payments actually raised the dollar demand and dragged down the rupee to a four-month low, as buyers recently lifted around $90 million from the market for corporate and import payments

The rupee's previous record low was set in February when it eased to 85.15. The rupee has lost 0.99 per cent against the dollar this year after losing 6.17 per cent last year and a 22.12 per cent slide in 2008.

The local currency had largely been stable since November 2008 when the country was forced to turn to the International Monetary Fund (IMF) for a $7.6 billion loan to avoid default on foreign payments. The loan amount was later augmented to $11.3 billion in July last year. The country received fifth tranche of $1.13 billion from the fund on May18.

The fifth tranche from the IMF was delayed by about a month. The IMF loan helped the central bank build foreign exchange reserves of over $16 billion and kept the rupee stable against the US currency. 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 Rs61 to a dollar, which is presently valued at Rs83 to a dollar. 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. The country meets 80 per cent of its fuel requirements through oil imports.

Local currency is currently on depreciation path despite the country's foreign exchange reserves bulged to $16 billion, as Pakistan received $288.6 million under expenditures incurred in war on terror.

Similarly, the remittances sent home by the overseas Pakistanis registered a growth of 15 per cent during the first 10 months (July-April) 2009-10 to $7.306 billion from $6.355 billion during the corresponding period last year. The country's current account deficit also came down mainly due to decrease in imports and increase in remittances, helping the rupee.

The country's central bank lowered its forecast for current account deficit to between 2.2 per cent and 2.8 per cent of gross domestic product (GDP) for the outgoing fiscal year 2009-10, ending on June 30, because of an impressive performance of exports and workers' remittances, from an earlier estimate of between 3.2 per cent and 3.8 per cent of GDP.

The central bank also raised its GDP growth forecast to 4.1 per cent for the outgoing fiscal year 2009-10, compared with a GDP growth of 1.2 per cent last fiscal year. The central bank's previous forecast was between 2.5 per cent and 3.5 per cent.

"The resulting improvement in business confidence, together with reasonable harvests, expansionary fiscal stance, and a small recovery in the global economy, has fostered growth in current fiscal year," the central bank said in a quarterly report on the economy.

The rupee has lost around 35 per cent against the dollar since February 2008, when the Pakistan Peoples Party-led coalition government came to power. The frequent depreciation of the exchange rate in two years added Rs1125 billion to public debt, significantly increasing the rupee cost of foreign debt servicing. The total foreign and domestic public debt is at 58.1 per cent of the GDP, according to Debt Policy Statement 2009-2010. The falling rupee has also failed to increase the country's exports, which have been stagnant for the last two years.

The consistent depreciation of the local currency against green bank is also contributing factor to inflationary pressures. Rupee's devaluation is fuelling inflation and eroding the purchasing power of the people belonging to the middle class. Soaring prices of essential commodities including foodstuff have made the lives of the poor and the lower middle class increasingly difficult, as they are struggling to meet the minimum standards of living.

The central bank has revised its average inflation for 2009-10 upwards at between 11.5 per cent and 12.5 per cent, compared with the earlier forecast of between 11 per cent and 12 per cent.

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.