June 18 - 24, 20

Constant pressure on foreign reserves is causing freefall of Pak rupee against the US dollar. So much so, that rupee stooped low at 94.29/36 per dollar on Monday last. It is worthwhile to recall that rupee value dipped five-month low at 91.30 per dollar in the interbank market on Monday, 21st May 2012.

Recent weeks saw rupee making new records every day of lows against the US dollar. Overall, it has lost nearly 10 per cent of its value to a dollar so far in the country's fiscal year ending June 30, 2012.

Analysts have attributed the devaluation of Pak rupee to mainly depleting foreign reserves. Slowdown in external flows including declining exports, delays in coalition support fund (CSF), flight of greenback on foreign loan repayments, and rising oil import bill are the prime causes of lower exchange rate.

The state bank of Pakistan (SBP) has kept the interest rate unchanged at 12 per cent in the recently announced monetary policy decision. The interest rate is at the current position since October 8, 2011 when the SBP cut it down by 150 basis points. The benchmark interest rate is still among the highest in the region.

"While managing the external and fiscal pressures remains more of an immediate concern, the real challenge lies in reviving private investment in the economy," said the central bank in a statement. "The economy needs substantial external inflows to preserve our foreign exchange reserves," it added.

Higher interest rate serves to attract foreign funds in an economy leading to increased exchange rate disparity. However, if inflation is galloping in an economy, then inflating interest rate does not come to fruition in attracting foreign investments.

Generally, Asian currencies are losing ground due to waning risk appetite of foreign funds. Slowdown in private capital inflows because of European banking sector deleveraging, risk aversion, and unstable current account position have resulted in balance of payments difficulties in these economies.

Indian economy-the largest in South Asia accounting for 80 per cent of regional output-is losing steam. It is expected to have grown only 6.5 per cent for its fiscal year ended March 2012, much below the target of 6.9 per cent and even lower than 6.7 per cent achieved during the global financial crisis in 2008-09, according to AFP.

Indian rupee (INR) lost 10 per cent of its value a dollar between February and early June. Local currency went down as low as 56.38 to a dollar at the end of May. INR has clinched the title of biggest loser in Asia this year among the currencies monitored by Reuters. It may go down 60 vis-a-vis a dollar in near future in view of its unstoppable slide, this is what analysts predict.

Indian government is pushing up interest rate on deposits in dollars to attract foreign investment. Last month, Reserve Bank of India jacked up interest rate on deposits in foreign currencies by up to three per cent. Global funds have already assumed cautious mode after the Standard & Poor's downgrading of India's credit outlook to negative. Consequently, the country would be expelled out of the investment-grade economies-a status that opens floodgate of foreign investments.

Euro debt crisis may be snapped as Spain has requested for 100 billion euro ($126 billion) loan from Euro government to prop up its banks. The rescue package would be 2.7 times what international monetary fund (IMF) recommended.

According to the analysts, the optimism may likely fizzle if Greece comes out with the election (held on June 17) results voting in favour of bidding farewell to euro zone. This would really be a catalyst to the debt crisis.

Relationship between Pakistan and the U.S. has soured after the killing of Pakistan's army personnel during an attack by the US-led Nato forces on Pak-Afghan border. Consequently, Pakistan disallowed Nato supplies entering Afghanistan through its routes and in retaliation US stopped non-military assistance to its chief ally on war on terror.

With Pakistan having decided to lift ban on Nato supplies in principle, the hope of stuck external flows is being rekindled. Australia has pledged $200 million assistance during the next three years under the Australia-Pakistan development partnership program.

Total foreign reserves of Pakistan fell $312 million during the week ended May 11 to $16.103 billion from $16.416 billion in the previous week due to repayment of foreign loan.

On July 30, 2011, dollar stocks touched the record mark of $18.313 billion. The level could not be sustained due obviously to repayments of foreign debts and payments of soaring import bill.

Pakistan has to repay approximately eight billion dollars to the IMF within three years. It has to cough up staggering $1.8 billion in 2012, $3.9 billion in 2013, and $2.1 billion in 2014.

Rescheduling of IMF loan repayment or moratorium at this crucial time when Pakistan's current account and fiscal deficits are significant, will provide the cash-strapped economy a fiscal space.

Pakistan imported $37 billion worth of products during July-April 2011/12. Alone oil import accounted for one-third of the country's total imports. Oil import bill climbed 44 per cent to $12.6 billion in the first ten months of current fiscal year.

High international oil prices are keeping oil import bill upward. Since domestic prices of petroleum products are increased to reduce losses of oil companies, inflation outlook is not hopeful.

Current account deficit is expected to stay at approximately 1.7 per cent of gross domestic product (GDP) for the outgoing fiscal year and will be same for the next fiscal year, according to the SBP. The deficit was recorded at $3.4 billion for July-April, 2011/12.

Capital inflows show positive sign in case of overseas workers remittances, which rose impressively 20.23 per cent, or $1.8 billion, to $10.9 billion in the first ten months of ongoing fiscal year. On an average, Pakistanis working abroad are remitting over one billion dollar a month.