Over
the last four years, since PPP government has taken over, the value of rupee
against the US dollar has depreciated cumulatively by 30 percent. At the end of
third quarter of FY 2007-08, the price of one USD was 62 rupees and now at the
end of second quarter of FY 2011-12 the price of 1 USD has reached to 91
rupees. With debt servicing, lack of external aid, dwindling reserves, import
payments, the pressure on rupee is expected to continue.
The pressure on rupee is continuing and no serious measures have been taken yet
to control this depreciation. If the pressure on rupee will continue then the
rupee will be depreciated to around rupees 100 to a USD at the end of 2012.
The main culprit behind this huge depreciation of exchange rate is
widening of the current account deficit during the period mentioned above,
because of the large trade deficit due to higher demand for imports and rising
oil and other commodity prices in international markets. In addition, financial
inflows and foreign capital also kept declining due to deteriorating law and
order situation in Pakistan and global financial crisis.
On the other hand, the cost of doing business in Pakistan is also increasing
due to this depreciation and it is also badly affecting the manufacturing,
industrial, and agriculture sectors of Pakistan as the country has to import
fertilisers, oil, machinery, and industrial raw material. Although the weaker
rupee has given benefit to exporters, as they are earning more, but this
benefit is neutralised by the costly imported inputs of manufacturing sector,
including textiles.
The impacts of this sliding value of rupee can be classified into three main
segments: first is the higher price of imported goods that households have to
face, for example the higher cost of food imports and the higher cost of fuel
imports. If we talk about oil import payments which are being paid in USD and
make up about 40 percent of the total import bill, they are increasing the
pressure on rupee. Oil imports have increased to $6.299 billion from
July-November 2011, compared with $4.237 billion in the same period last fiscal
year. Furthermore, the oil import bill is likely to increase because gas crisis
is now forcing factory owners to run their business on oil.
Second impact is the higher cost of import burden for the industries, so the
industries that import lot of raw material as well as machinery from abroad now
have to give a higher price for imports.
Third is the rising cost of debt burden which of course is linked with whatever
the rupee value internationally is, and if this cost of debt servicing goes up,
this actually implies the greater burden on the coming generations as well. The
depreciation of exchange rate not only contributes to the surge in public debt
but also it is inflationary by definition and it has also multi-dimensional
adverse impact on economy and on people. I had explained in my previous article
that the sharp depreciation of rupee had contributed to the rise in public debt
as this depreciation alone had contributed roughly 1.3 trillion rupees of debt.
Given the current fiscal situation of the country as the government continues
to finance the loss-making public sector enterprises and also continues with
untargeted subsidies, the State Bank of Pakistan as well as commercial banks
come into picture where they need to finance the government’s borrowing
requirements. Once the banking system of the country mortgaged to the
government’s needs, it squeezes the financing that would have been available
for private sector as well. Now the additional inflation that gets created
because of existence of extra money in the transmission channel, not only
creates a price hike domestically but also puts the rupee in pressure vis-à-vis
other currencies.
This in turn has two impacts: first it makes imports expensive as we know
almost 60 percent Pakistani exports have in imported context, that have
repercussion on exports particularly of industrial sector and secondly it makes
existing debt stock more expensive.
Stabilising the currency and making an effective strategy to control this
depreciation policy makers have to focus on growth reforms, supply side
measures and expands its production particularly in case of export oriented
industries. One does not expect the currency to be safeguarded otherwise, it
has to be the focus on productivity that will actually safe the currency in
future. So, Pakistan needs to improve fiscal framework not only to stabilise
budget but currency also which runs the risk of going into a free fall.
Pakistan needs to look very closely at two things, first at the Euro zone debt
crisis which will have its impact if it is prolonged, second at the related
fears about a double depreciation. Pakistan’s economic managers must keep very
close eye on both of these international trends which can in turn translate
into falling exports for Pakistan, falling aid inflows, foreign investment
inflow. In case both these crisis prolong, they will make adverse impact on the
currency.
The debt repayments will put further pressure on rupee as Pakistan will have to
repay $2.5 billion to international lenders in the coming six months, including
$1.2 billion to the International Monetary Fund (IMF) in February this year.
So, let’s see the policy makers will make an effective policy and implement it
in time or not to save the currency.
The writer is a consultant at SDPI and
can be reached at umar.adnan83@gmail.com
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