HEAVY BORROWING WEAKENING RUPEE

AMANULLAH BASHAR
(feedback@pgeconomist.com)
Sep 13 - 26, 20
10

The interest rate currently at 13 percent may go up by another 50bp to 13.50 percent in the next policy review by the central bank.

The increase in policy rate is a natural outcome of the mounting inflation that is aggravated by food inflation stemmed from flood devastations.

Actually, the repercussion of the growing foreign debt estimated around $53-$54 billion may further increase with the funding of $2 billion by Asian Development Bank for designing and reconstruction of the flood hit areas during next two years. It may be noted that Pakistan already owes over $20 billion to ADB.

The repercussions of the growing foreign debt is reflected in the heavy depression or depreciation of Pak currency which forces the central bank to further tighten the monetary policy as a tool to contain inflation.

Currently, Pakistan has liquid foreign reserves of over $16 billion but these reserves have least positive effect on strengthening the rupee because the major chunk of the foreign exchange reserves are based on borrowed money.

It was earlier mentioned that the currencies of even smaller economies like Bangladesh with a liquidity reserves of only $10 billion has currency stronger than Pak rupee because that reserves come from their hard earned money.

It is unfortunate that in the wake of flood devastation the government was left with no option but to borrow more from international donor agencies to combat the flood damages to over two million households, infrastructure, schools, livestock etc.

However, contrary to that option of borrowing money from external resources, seasoned economic experts and business leaders were of the opinion instead of borrowing from external resources Pakistan has a strong case of convincing the world economies for waiver of the foreign debt which have a killing effect on the depressed economy. Besides, Pakistan should concentrate on its domestic resources as well as overseas Pakistanis which have done a wonder by remitting around $10 billion during financial year 2010.

OFFICIAL ESTIMATES OF THE FLOOD DAMAGES

The official estimates of the losses caused by the flash floods will be made on October 10 in assistance with the international donor agencies especially the World Bank and Asian Development Bank. However, preliminary estimates indicate that the worst floods in the history have derailed macro stability that achieved since 2008 as the damages are being measured in the range of US$10-20billion in total while the agriculture alone suffered $4 billion, said financial experts.

It is feared that the economy with a GDP size of US$175 billion is likely to enter a growth recession in the financial year 2011. The chain effect of the flood devastation caused damages to 13 percent of farland and there have been massive infrastructure and property damages. It is feared that economy is likely to enter a growth recession from current rate two percent as there is a risk of a further drop, driven by decline in agriculture output.

Financial experts were of the view that there is a risk of another 50bp hike in policy rate in the next review by the central bank. In this backdrop, the financial experts foresee a hike in policy rate by 50bp to 13.5 per cent and this would lead to increase in commodity prices abnormally. The country heavily depends on imports, which could ignite imbalances and inflation further, the experts said.

The management capability of the government matters a lot to match the higher capital flows to bridge the resource gap and part recourse to domestic sources. It would be significant to mention that foreign commitments so far include IMF US$450million, UN US$900million, ADB US$2billion and World Bank US$1billion.

Since the PKR continues to be in a depressed state against foreign currencies the weaker rupee adds to the cost of imports because Pakistan is a net importer of fuel oil and other engineering goods.

It may be noted that due to the unprecedented appreciation in Japanese Yen which is at a 15 year high against major currencies left no option for automobile producers but increase prices with immediate effect.

The rising yen value has made the imported CKD and even local parts more costly as most of the raw materials are also imported.

The auto industry allied with Japanese technology has no option but to raise the price of their vehicles. In this respect, Indus motor company, which has been absorbing most of the costs reducing its profit, is forced to marginally increase its car prices with immediate effect.

In this respect, the retail prices of all Corolla variants will be increased by Rs25,000 while Altis price will be increased by Rs35,000 which translates into less than 2 percent increase on all the models.

The Corolla prices have remained unchanged since February 2010, while during this period the Pakistan rupee has depreciated by 8 percent against yen and the company has been absorbing that cost over the last few months.

Extensive flooding in the country has also taken a severe toll on the car sales and has further added to the misery of an industry already plagued with the above inflationary pressures. The company as a policy does not charge this increase in price to all customers who have booked and paid prior to this announcement and the company will fully absorb the cost impact on orders in hand. The new prices will be applicable to all future orders and deliveries.

It may be noted that the sales of locally assembled cars and light commercial vehicles have dropped considerably that stood at 11,076 units only in August 2010.

It is feared that during current month of September the sales volumes are feared to be affected adversely.