RUPEE LOSING GROUND

FOZIA AROOJ
(feedback@pgeconomist.com)

Feb 27 - Mar 4, 20
12

The Pakistani rupee remained under intense pressure during the year 2011. Bleak economic outlook caused drastic depreciation in the value of rupee. During the last 12 months, PKR exchange rate depreciated 5.41 per cent against the US Dollar. The rupee fell sharply versus dollar, losing Rs4.33. Historically, from 1988 until 2012 the USDPKR exchange averaged 56.58 and reached a historical high of 90.84 in February of 2012. The higher import payments, repayment of foreign loans, liquidity shortages and weakening macroeconomic situation have kept the currency of Pakistan in uncertain position.

Moreover, Pakistan has to start paying back $8.4 billion loan to IMF and more than $1.1 billion are alone due in the first half of 2012. Hence, the massive pressure on the foreign reserves is yet to come in the form of repayments of outstanding loans in the second half of the fiscal year, which could further deteriorate on the already weakening position of the rupee.

It is pertinent to relate that since the year 2001-02 the economic indicators were exhibiting some apparent improvement and the rupee also stabilized in the range of (Rs) 59-60 per dollar till 2006 and May 2007 (Rs60) but after that the currency started devaluing since 2007 to date. This extensive decline in the value of money has given rise to a worse current account deficit also. According to the State Bank of Pakistan data, in the first six months of the fiscal year 2011/12, Pakistan's current account deficit widened to $2.154 billion.

Remorseless upward trend in the global oil prices, escalating imports causing a surge in dollars' demand, weak macro-economic indications, and political uncertainties have dragged the rupee down. Another factor accelerating the devaluation of rupee has been a drastic cut in the foreign inflows. This drop in disbursement has been mainly because of the major donor countries facing tough times in their economic circle. Moreover, the relationship with the leading fund contributors of Pakistan, United States, also reached at a depressing point, which further aggravated the dollar supply in the economy posing more pressure on Pakistan Currency.

The freefall of rupee can also be attributed to the indifferent attitude of the institutions who do not seem bothered about arresting the rupee's slide. Banks buy dollar from the open market and then resell it to the importers at an unreasonably high rate. Major banks like Citibank, MCB Bank and others have been buying dollars fearing further devaluation of the rupee following increase in greenback demand on account of oil import bill payment. This practice tends to damage the economy slowly but surely. Noticing speculative dollar buying, the central bank linked forward purchases by importers to actual maturity of import letters of credit and the restriction had immediately forced down forward premiums.

A quite obvious consequence of devaluation is to worsen the balance of payment position and raise the burden of Pakistan's foreign debt and debt service liability. According to the SBP, 94.9 per cent of Pakistan's EDLs (external debt and liabilities) are denominated in four major currencies i.e. US dollar, Japanese yen, euros, and SDRs. Exchange rate movements (appreciation or depreciation) of the US dollar against other major currencies (yen, euros and SDRs) have a significant effect on the stock of EDL. In absolute terms, Pakistan's total external debt and liabilities (EDL) witnessed a rise of $4.5 billion during the year to reach $61.8 billion by end FY 11.

These foreign loans repayments break the back of the budget leading to a galloping inflation, and stalling many ongoing projects due to rising costs.

This constant devaluation has given rise to a significant and abrupt increase in prices. The price of furnace oil - the basic input to thermal power generation has skyrocketed in the international market and is further surged forcing the government to increase power tariff. Any additional raise in power tariff would encourage power theft and lesser revenues will be available to government. This would exacerbate the issue of circular debt even more. The prices of imported fertilizer especially urea and DAP are already soaring high and going even higher due to depreciation in the value of rupee. In turn, the prices of all imported agriculture inputs will also increase, thus forcing the government to increase the support price of various agri crops to protect the interest of the growers. This all is bound to bump up the inflationary pressure.

In Pakistan, industries are heavily dependent on imported raw materials for industrial goods and capital goods and components. Their access to many advanced countries is constrained by quotas and tariffs. Rising of the prices of such inputs through devaluation have raised industrial costs and reduced the intensity of capacity utilization. It has a negative impact on certain specific industries like auto sector.

The only probable positive outcome of devaluation in the currency can be to evoke a favorable long-term response in terms of improved exports. It can affect positively to cement and textile sector. This is because the weaker rupee ideally should benefit to exporters by giving them more rupees per dollar, but this benefit is neutralized by the costly imported inputs of manufacturing sector including textiles thus eroding the financial advantage of a weaker rupee. Unfortunately, successive devaluation in PKR has failed to give boost to exports. It has not only encouraged speculation but also shattered the confidence of the foreign investor in the domestic economy. Owing to weaker commodity prices and severe energy crisis in the country, there has been a slack growth in exports playing its role in currency deterioration. Furthermore, the slow demand of Pakistani products in other countries due to weak global economic growth also aggravated the ailing situation.

In the long run these circumstances are taking the economy on the path of devaluation . A long term plan is required to put the economy on the right track.

Neither the government nor the central bank is taking any actions to stop this freefall. There is an enormous pressure on foreign exchange reserves at the moment and people have started worrying about what will happen to the exchange rate when the repayment of IMF loan starts. The situation is expected to remain precarious in later part of the year as the global economic outlook is unlikely to be revitalized and could drive further deterioration on the external front. Besides, in the wake of deteriorating Pak-US relation, the exchange rate may appear with negative outlook because there are no inflows from other sources. There are only remittances sent by overseas Pakistanis, or export proceeds. The International Monetary Fund forecast that Pakistan's economic growth for the 2011/12 fiscal year would go down to 3.5 percent, lower than the government's target of 4.2 percent.

Faster the depreciation of the rupee, higher will be inflation and lower the competitiveness of Pakistan's business and industry. Therefore, government should get quickly into action to arrest this dangerous trend to bring stabilization in exchange rate to protect national economy from further damage.