DEPRECIATING RUPEE FUELLING INFLATION

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Jan 2 - 8, 20
12

During just ended year 2011, rupee depreciated by about five per cent. This has impacted every segment of the economy most negatively.

Many of the exporters are carried away due to getting higher proceeds in rupee terms for the shipments made in the past. However, they emerge net losers in the end.

Worst hit is the general public because country suffers from cost pushed inflation. For containing inflation, orthodox economists suggest increase in discount rate, which also fuels inflation due to rising cost of doing business.

In a nutshell, depreciating rupee causes more problem than benefiting any segment of the economy.

There is general perception that depreciation of rupee benefits exporters, which is totally incorrect. They may get higher proceeds for the products exported in the past but it is only temporary phenomenon. Very soon, buyers start demanding reduction in price or exporters tempted to give discount without having any realization that cost of production goes up with the depreciation of currency. In fact, cost of doing business goes up as every thing becomes expensive.

Since bulk of Pakistan's electricity generation capacity is thermal based, the immediate and most adverse impact is that electricity tariffs have to be adjusted with regular intervals.

Industrial consumers face serious problems because of fuel adjustment surcharge. Since it is charged retrospectively, manufacturers have to face mixed experience. Mostly the charges are higher than their expectations. The general consensus is that electric utilities recover high fuel adjustment surcharge as national electric power regulatory authority (Nepra) hardly bothers to ensure that only corresponding increase has been made or not.

Government of Pakistan (GoP) is also a victim of depreciating value of currency because it adds to foreign debt servicing. The general perception is that this borrowing is in foreign currency. Therefore, there should be no impact of depreciation/appreciation of rupee on debt servicing.

It is true that amount remains the same in dollar terms but becomes higher in rupee terms. This widens budget deficit and forces the government to borrow more from domestic sources. Not only that borrowing exceeds target but also leaves lesser funds for the private sector.

Many people say that inflation is the outcome of demand exceeding supply. However, reality is contrary because Pakistan suffers from cost pushed inflation. Depreciation of rupee increases cost of every imported commodity i.e. crude/petroleum products, fertilizer, industrial raw materials, cars, cell phones etc.

Pakistan imports huge quantity of crude oil and petroleum products. It faces double- edged sword because with the depreciation of rupee, landed cost increases and due to shortage of gas, import of POL increased substantially.

Higher oil import erodes foreign exchange reserves, which increases exchange rate volatility. With the rising demand for dollar, capacity of the central bank to intervene also weakens and a rush for the purchase of foreign exchange encourages people to covert their saving to dollars from rupee. This phenomenon is commonly known as dollarization of the economy.

With the deprecation of rupee, cost of agriculture inputs and implements also goes up and farmers start demanding increase in support prices of their produce. Any increase in support price of wheat and sugarcane leads to higher prices of food products.

Similarly, farmers also start demanding higher price of cotton and edible oilseeds. Any increase in food and industrial raw material further fuels inflation.

Inflation affects purchasing power of people. Therefore, employees/workers demand corresponding increase in salaries/perks, which also adds to the cost of doing business and prompts manufacturers to regularly increase price of finished products.

Cost of transportation also increases which affects their purchasing power. Pakistan already suffering from very low savings to GDP ratio faces even more alarming situation because people start using their savings.

The only regret is that an individual can hardly do any thing to minimize the adverse impact of currency deprecation. Any thing and every thing have to be done by the policy planners and economic managers. Currencies of those countries remain stable that have stable economy.

To stabilize the economy, the government has to facilitate investment, remove irritants, and provide incentives to accelerate GDP growth rate.

Energy crisis has virtually brought the economy at grinding halt. Hundred of industrial units have been closed because of non-availability of electricity and gas, millions of people have been rendered jobless, and there is hardly any fresh investment.

Since local investors are shy, foreign investors are also reluctant to invest in Pakistan. While India is striving to achieve 10 per cent GDP growth, Pakistan finds it difficult to achieve even 2.5 per cent. The natural outcome is declining exports and rising imports.

There are growing concerns that if erosion of foreign exchange reserves continues at the current pace, Pakistan can face real precarious situation.

The most regrettable point is that Pakistan's economic managers are solely responsible for the prevailing malice. Their habit of sweeping the problems under the carpet and lack of capacity to make difficult decisions is adding to the woes of public.