Jan 2 - 8, 20

The measures taken by the central bank to stabilize the exchange rate and check the fast depreciation of Pakistani rupee versus foreign currencies specially the US dollar proved short lived and ineffective.

The central bank moved in the third week of last month (Dec 2011) when the rupee hit the lowest ever exchange rate of Rs90.3 against a dollar on Dec 21.

Apart from other measures, the state bank released millions of dollars from its reserves to meet the rising demand of dollars and ease the market. It worked for a few days and the exchange rate came down to Rs89.14 on Dec 26.

On next morning, the rupee again started depreciating and the parity reached to Rs89.90 on Dec 28.

In the local currency market, the rupee remained constantly under pressure against the US dollar during the last few months and the rupee depreciated to ever low rate of Rs90 to a dollar against Rs85 in July last year because of strong demand of the US currency emerging from forward dollar buying by importers amid uncertain political conditions and depressed economic activities.

The state bank woke up after the dollar crossed the Rs90 mark and quickly took some actions to save the rupee from further fall. It released 71 million dollars from its own reserves besides revising and streamlining the instructions regarding forward coverage facilities being provided by banks against the imports.

According to the experts, this depreciation was long expected and it would continue at least in the near future as well. This view is shared by the senior officials of finance ministry and the state bank, but they were not prepared to say so on record.

There are multiple reasons for the current decline in the rupee value while emerging macroeconomic risks suggest that the central bank's ability to defend the rupee through its calibrated interventions could not be continued endlessly.

One of the major reasons for the current situation is Pakistan's external account balance which is deteriorating at a fast pace in the wake of dwindling or no foreign inflows which, in turn, forbids the central bank to continue its support for the rupee as this will result in drawdown in the country's foreign exchange reserves.

Economists are already expressing concern about the fast deteriorating external accounts saying that the current accounts have turned into negative due to drying up foreign direct investments and gross aid inflows in the presence of fixed debts payments.

During the first five months of the current fiscal, the current account deficit ballooned to about two billion dollars against $600 million during the corresponding period last year despite a reasonable growth in exports and in home remittances.

According to them, the odds are certainly against the rupee and it is all set to brace even tougher days ahead.

Some experts believe that the exchange value of rupee may further fall in the next few months and it may end up to Rs100 to a dollar by July 2012.

Pakistan has only one option and that is to secure another IMF loan, they said.

Pakistan turned its back on the IMF in September 2011 after failing to secure the last two installments of $11.3 billion standby package signed in the year 2008 when the PPP led government came into power.

It was done because the incumbent government badly failed to implement the economic reforms program suggested by the IMF and tied with the aid package. The reform package was not implemented mainly because of political reason. Under the reform program also included the condition to bring income from agriculture into tax net, which was not acceptable to the landed aristocracy, which dominates the government.

Pakistan has to repay $1.4 billion to the IMF during the next six months towards repayment of the loan obtained from the IMF under the standby arrangement loan. This payment is likely to exert pressure on the foreign exchange reserves of the country.

The recent US decision to freeze Pakistan's military aid has also dealt a heavy blow to the market sentiments. Though the finance minister Dr. Hafeez Sheikh has publically ruled out the option of going back to the IMF, the question arises, "will Pakistan be able to keep the economy afloat without external loans".

An insider confided, "This government is champion of taking u-turn. You will soon find them approaching the IMF" This appears to be sensible assessment. There is no other way out.

Exports have recently softened and may worsen in months ahead. Current account is now in deficit, political uncertainty is at its peak while ties with the United States are deteriorating with every passing day.

On top of it, the IMF loan has to be repaid starting this year. The central bank in its latest annual report projected over two percent current account deficit during the ongoing fiscal year against the government target of 0.6 percent.

Higher imports this year is likely to inflate trade deficit. Under the poor macroeconomic conditions and the deteriorating law and order situation, improvement in investment also appears unlikely in the near future.

Suspension of the IMF program will also keep inflows from other donors low. As rightly pointed out in the annual report of the central bank, the days of current account supporting financial accounts are over. There seems no way out but to take a u-turn and approach the IMF for a bailout package even at a much harsher terms.