ASIAN ECONOMIES FOCUSING ON CURRENCY STABILITY

RUPEE IS SINKING AGAINST DOLLAR.

AMANULLAH BASHAR
(feedback@pgeconomist.com)

Jan 2 - 8, 20
12

The unabated slide of Asian currencies including Pakistani rupee against dollar is being attributed to current economic recession, rising inflationary pressures and ever-increasing cost of production causing negative growth in the manufacturing sector of Pakistan.

The weakening of rupee has seriously eroded the purchasing power of the common person. A tidal inflationary pressure is looming large if the depreciating rupee is not supported by the financial regulator.

The current trend of rupee depreciation has stirred the minds of business community, which is sensing that the rupee value against dollar may cross the mark of Rs100.

In order to combat the declining value of the local currencies, the prominent Asian economies including China, Japan, India, and Turkey have agreed to trade in local currencies to stabilize the respective currencies as well as promote regional trade.

In this respect, the latest development is an agreement between India and Japan as both the countries have agreed to a dollar swap arrangement of $15 billion, with a view to help stabilize the Indian rupee and boost trade between the two countries. It may be mentioned that an earlier three billion dollars arrangement between India and Japan that came into force in 2008, had expired in June.

Indian economic managers feel that the dollar swap arrangement would help India in supporting the rupee, which has depreciated by about 15-16 per cent against the US currency since April due to various global and domestic factors.

The step would certainly contribute to ensuring financial market stability, and further develop growing economic and trade ties between the countries. It is an interesting development, which is likely to take a momentum with the arrival of the other countries into this arrangement especially the south Asian association for regional cooperation (Saarc) region.

Sometimes, local currency is deliberately devalued to give a boost to the exports as India, Sri Lanka, and Bangladesh are doing to lay hands on international competitiveness. However, the devaluation of currency for the sake of exports does not bode well for other sectors. The side effects of the currency devaluation wash away all the benefits of exports besides adversely affecting the credit rating of the economy. The currency devaluation works well when the manufacturing sector operates on the economy of scale. We have a small size of exports ranging between $22 billion to $25 billion as compared to much larger export base of India and other economies.

On the other hand, the imports have been increasing abruptly that may upset the balance of trade that also prove counter productive to the theory of devaluation of the local currency just to encourage exports.

However, the recent move taken by Pakistan towards trade in local currency seems a right step in the right direction to get rid of the pressures of the international currencies.

Pakistan has signed an arrangement for trade in local currency with China followed by a similar agreement with Turkey in November 2011.

It will be interesting to mention that the major part of our imports i.e. oil and other petroleum products, which constitute almost half of the total imports, is an area, which needs to be taken seriously. Pakistan imports its oil requirements from Middle East while a major chunk of our exports is also destined to the gulf region.

The situation calls for an effort to enter into a currency swap arrangement (CSA) with the Middle East economies. Pakistan's most of the financial worries and stresses would be eased to a great extent including the mind pricking issue of balance of payment, if the financial managers could arrange the similar arrangement with the gulf countries as well.

The CSA with China has been executed for a tenor of three years in respective local currencies: PKR140 billion and Chinese Yuan 10 billion.

While these are strictly bilateral arrangements, the precise terms and conditions of each of these CSAs are confidential between the central banks of the two countries. However, a close scrutiny of the information available in the public domain indicates that the principal objective of these swaps is to promote the use of regional currencies for trade settlement purposes and specifically in the case of China, it is to enhance the role of the Chinese Yuan in international trade and investment.

China's concurrent Yuan local currency settlement program is also consistent with the underlying currency swap objectives. The latest CSA between Pakistan and China also reflects similar objectives of promoting trade and investment in bilateral currencies.

Under this arrangement, the central bank will have the ability to draw on the swap line and provide Chinese Yuan to banks in Pakistan. Banks will on-lend this liquidity to importers/ exporters involved in trade denominated in Yuan. At maturity, the importer/exporter will repay the foreign currency to the lending bank; and the bank will repay to the respective central bank. The trade financing regulations in foreign currencies are already available in Pakistan for providing liquidity and facilitating trade.

CONCLUSION: Since the devaluation of rupee has a widespread impact on the socioeconomic front besides triggering inflationary pressures, which affect the common man, it is high time for the financial regulators to focus on giving some respect to the local currency rather than printing of notes of high denominations. In this regard, the latest option of CSAs with the countries of the region is the need of the time and deserves support of all the member countries in the Saarc region in their own interest of their respective economies.