RUPEE ON TEMPORARY STABILITY
SHABBIR H. KAZMI
Sep 6 - 12, 2010
The growing foreign exchange reserves of Pakistan in the aftermath of standby arrangement with the International Monetary Fund (IMF) as well as record receipt of remittances have helped in containing exchange rate volatility. The experts are of the opinion that the country needs to boost its exports to finance imports. They are also of the opinion that a comprehensive plan to get an exit from the IMF is a must.
However, the objective can't be achieved without accelerating GDP growth rate, creating exportable surplus and above all bringing down cost of doing business in the country.
While the analysts believe exchange rate volatility is one of the major causes of inflation the prevailing situation does not support the perception. But it was very true for FY08 when rupee depreciated by a whopping 28 per cent.
The exchange rate volatility has subsided to a large extent, thanks to the IMF and overseas Pakistanis over the last two financial years. In FY09, rupee eroded by 6.5 per cent and in FY10 marginally by 1.4 per cent. The stability in exchange rate not only started reversal of dollarisation processes but also increased receipt of remittances through formal channels. However, if one ignores the dollars received from the IMF and those held by individuals, the situation is not satisfactory.
In the recent past, particularly in FY08 Pakistan faced high inflation because of two main reasons: 1) exceptionally high commodity prices and 2) whopping erosion in rupee value. This inflation is usually termed cost pushed inflation. However, consumers have a regret that though prices of crude oil, wheat, fertiliser and other food products have reduced to half of the peak touched in 2008 there has not been a corresponding reduction in prices of these products in the local markets. One can't find a generic reason for prices remaining at higher level. Analysis of price movement of various products needs to be done.
International prices of crude oil have reduced to half from a peak of over US$147/barrel to around $75 but local prices of POL have actually gone up. The economic managers of the present regime attribute this to the fault of previous government which artificially kept POL prices low by paying huge subsidy. However, independent analysts term the phenomenon the outcome of bad policies of the present regime, which in a lust to increase revenue collection has kept the rate of levy/surcharge high. Despite persistent increase in electricity tariff they have failed in ensuring uninterrupted supply. Tariff hike has also failed in improving cash flow of distribution companies as transmission and distribution losses are still hovering around 40 per cent. In an attempt to contain inter corporate debt, thermal power plants are run at lower capacity and more electricity from independent power producers is bought; akin to 'if they don't get bread they should eat cake'.
Over the last couple of years consumers have been enduring electricity load shedding ranging from four to sixteen hours, despite tall claims of Pakistan Electric Power Company (Pepco) and Karachi Electric Supply Company (KESC). This has been adversely affecting industrial production and productivity. Running the plants/factories on standby generators adds to cost rendering Pakistani manufacturers uncompetitive in the global markets. The policy of keeping interest rate has not helped in containing the inflation rate but certainly forced the entrepreneurs to defer their investment decisions for creating new productive facilities.
Referring to two absurdities is necessary 1) importing refined sugar instead of raw sugar and 2) curtailing gas supply of fertiliser plants and diverting the gas to thermal power plants. Import of sugar and fertiliser eroded country's foreign exchange reserves and also forced the government to pay billions of rupees subsidy. The policy planners didn't allow import and processing of raw sugar to compensate inadequate supply of sugarcane and also imported refined sugar when its prices were hovering at the peak. Added to this was flotation of tenders for import of two million tons sugar, whereas the country needed to import half a million ton.
One also fails to understand the logic of selling sugar at Rs55/kg as against a landed cost of Rs70/kg. This provided an incentive to local sugar mills to also increase the ex-factory price.
Since January this year the country has imported around one million ton urea fertiliser, mainly due to curtailment of gas supply to urea manufacturing plant and diverting the gas to thermal power plants. This eroded foreign exchange by $400 million and forced the government to also pay subsidy amounting to (200 million x Rs85). Allocating more gas to thermal power plants neither helped in bringing the tariff for consumers significantly low nor any reduction in inter corporate debt was achieved. It was mainly because distribution companies failed in bringing down transmission and distribution losses, the basic reason on liquidity crunch.
Though flood devastation is enormous inflow of aid in cash is likely to push the country's foreign exchange reserves beyond $20 billion. The added advantage is disbursement of most of the fund will be in rupee. However, austerity drive in the aftermath of floods is a must. Each dollar needs to be spent very prudently. The money must reach affected people.