REPERCUSSIONS OF FALLING RUPEE FOR ECONOMY

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Jan 2 - 8, 20
12

The Pakistani rupee that hit a record low of 90 to a dollar is under pressure due to a widening current account deficit, which stood at $2.104 billion in July-November compared with $589 million in the same period a year earlier.

The analysts attribute the rupee's record slide to the import payments, negative sentiment about the country's economic outlook and stalled IMF bailout program. Some analysts predict that the pressure on rupee might take it to Rs95 a US dollar by June 2012.

Depreciation of rupee is likely to have repercussions for the government's total debt, which would automatically increase because the public debt is presented in the rupee terms.

The country's external debt has crossed $61 billion mark, while the government borrowing from the commercial banks stood at Rs653.74 billion from July to November 25, which stood at Rs54.627 billion in previous year.

The domestic debt grew at an alarming pace, as the cash-strapped government used domestic banking sources as the only option of borrowing after the International Monetary Fund (IMF) stopped loaning to the country last year and other international financial institutions including the World bank and Asian Development Bank also halted their loan programs over the country's inability to implement economic reforms.

Despite persistent warnings from the central bank, Pakistani government could not reduce its rising expenditures and continued to borrow from the central bank.

Islamabad decided to rebuff IMF cash and ended the recent $11.3 billion loan program on September 30 with the last two tranches of over three billion dollars undisbursed.

The hugely indebted country will face difficulty earlier 2012 when it will have to pay several loans including IMF loan due for repayment. The government as its only option is likely to seek a new IMF program to pay back the loans from the first program.

In case of new loan request, the IMF would likely to put forward a proposal before Pakistan that surplus cash crops should be kept under the IMF supervision besides taking a tougher stance for complete end of subsidy on power and lowering of financial deficit.

Presently, the non-intervention of the State bank in the market operations denotes that the central bank has allowed the rupee to slide against the greenback in a move to boost exports and attract more workers remittances from abroad. The overall exports may enter a negative growth in the months ahead, causing balance of payment problem for the country again after three years.

The gains on export and remittances front however will be short term in a country where export-oriented industries heavily depend on imported raw materials.

A depreciating rupee will make imports costlier, which in turn fuel inflation. Consumer price index (CPI) inflation rose 10.19 percent in November from a year ago.

This is the first time in five months that the month-on-month increase in inflation slipped below one per cent. The analysts however warn that CPI inflation could witness a rising trend in the second half of the current fiscal year 2011-12 (January-June) due to oil price shock and continuous devaluation of rupee against the US dollar. The country's average inflation surged to 11.1 per cent in first five months of the current fiscal (July-November). The government has set average inflation target at 12 per cent for the current fiscal year.

The IMF has already warned Islamabad of challenging outlook for the country's economy for the current fiscal year ending June 2012.

Weak economic fundamentals and slowdown in foreign investment at a time when the country is without any IMF loan, has actually brought the rupee under pressure.

The country's gap between external payments and receipts in November swelled to $478 million, up 66.5 percent from October, according to the central bank.

It seems difficult for the country to sustain its balance of payment without assistance of international donors and lenders.

Rising current account deficit forced the country in 2008 to turn to the IMF for a $11.3 billion loan under Standby Arrangement (SBA) to avoid default on international payment obligations.

Outcome of 10-day talks between IMF and Pakistani officials held in Dubai in November showed no sign that IMF would negotiate new loans as it has already refused to issue remaining tranche of the loan.

The country's foreign exchange reserves fell to $16.88 billion in the week ending on November 25, down from a record $18.31 billion in the week ended on July 30.

In a recent statement, the IMF said the ongoing security concerns in the country and global risk aversion are likely to limit capital inflows.

The foreign direct investment (FDI) in the country during July-October period of 2011-12 fell to just $340 million, a decline of 27.7 per cent while comparing with the same period of last year, according to the central bank.

Some dealers believe that reduction in the key policy rate by the central bank on Nov.30 accelerated the rupee's slide.

The State Bank of Pakistan (SBP) kept its benchmark interest rate unchanged at 12 per cent in its monetary policy announced on Nov. 30 for the next two months.

The central bank had previously reduced the rate by 150 basis points to 12 percent on October 8 to revive economic growth. Reduction in interest rate however served the government, which has been the biggest borrower.

Pakistan-US relations have an impact on relationship between the rupee and the greenback, as demand for the US dollar increases in the local currency market when their bilateral relations reach at a low ebb.

"If the relationship does deteriorate further, look for increased selling from foreign portfolio investors with the currency also likely to accelerate its recent slide towards a parity of 90 rupees to the dollar," Reuters reported Khalid Iqbal Siddiqui, director at Invest & Finance Securities Ltd. as saying.