Touching New Lows

The recent devaluation of the Pakistani rupee has affected all the economic targets, including those of imports and foreign debt repayment and servicing

By Shujauddin Qureshi

The Pakistani rupee witnessed yet another downslide earlier this month after May's massive devaluation, when it had reached the new low of Rs70 per US dollar. This time, the rupee could not even sustain the psychological barrier of Rs70 per dollar and went down further, touching Rs74 per dollar. However, after remedial measures by the State Bank of Pakistan (SBP), it receded and is currently hovering at around Rs70-71 per dollar.

The central bank is aware of the currency situation and continuously monitors the fluctuation of the Pakistani rupee on increasing demand of greenback. Though the SBP did not intervene this time by pumping US dollars in inter-bank trade, it, however, did adopt tight measures to halt the further slide of the Pakistani rupee.

The central bank suspended the forward booking of the dollar, reduced trading time, curtailed advance payments against imports from 50 to 25 percent and announced to make 100 percent payments for oil imports by itself. This provided a brief respite to the rupee, but bankers fear that due to the increasing demand of the dollar by importers, further depreciation will be hard to stop in the coming days.

In May 2008 too, the SBP had intervened and stabilised the currency through some administrative measures, such as pumping US dollars into the market. It may be recalled that the central bank had also asked private foreign exchange companies to transfer foreign currency from their nostro accounts held outside Pakistan to commercial banks inside the country and to close all the nostro accounts abroad.

The recent devaluation has affected all the economic targets, including those of imports and foreign debt repayment and servicing. The country's foreign debts and liabilities, which according to the SBP's data stood at $45.9 billion in March 2008, will also increase further as a result of the rupee's recent depreciation. It is pertinent to mention here that they stood at $40.5 billion on June 30, 2007.

The Economic Survey 2007-08, released in June 2008, points towards the increasing foreign debt burden: "The hard earned macro-economic stability appears to have been lost just in a space of one year (2007-08) of financial indiscipline." It further says the debt burden, which was decreasing till recently, is likely to increase again this year. Pakistan has paid a heavy price for financial indiscipline in the past and is likely to pay the same in the coming days unless sharp adjustment is made on the financial side quickly to regain the macro-economic stability, the Economic Survey 2007-08 rightly warns. Pakistan's debt situation will further aggravate with depreciation of the currency and economists believe that the country would have to resort to borrowing from the international financial institutions (IFIs), such as the International Monitory Fund (IMF).

As a result of the Pakistani rupee recent devaluation, petroleum products and food imports will be worst hit sectors. Pakistan is one of the major importers of food items -- such as tea, pulses, vegetable oil and wheat -- and they will become more expensive with this decision. The increasing prices of edible oil, pulses and flour have already upset the budget of the common people and the recent devaluation will put an additional burden on their pockets. This will also add to the inflation, which is already in double digits.

According to the SBP's statistics, the country's general Consumer Price Index (CPI), or inflation rate, in the financial year 2007-08 was 12 percent, against that of 7.8 percent in the financial year 2006-07. Importantly, the food inflation shot up to 17.6 percent against the previous financial year's 10.3 percent. "The rupee's devaluation will certainly cause further increase in the prices of food items, which are already quite high," says Anis Majeed, chairman of the Karachi Wholesale Grocers Association. He, however, adds that the international prices of commodities are on the higher side and most countries are facing food shortages because of lower production and higher prices.

Majeed says those importers who had booked their orders a few months back at Rs62-64 per dollar will now have to pay Rs72-73 per dollar to get their papers cleared and that this will be reflected in the prices of commodities in the coming days. "The recent devaluation will upset all estimates of imports," he warns. Some importers even got their papers cleared in a hurry at Rs74 per dollar last week, when the rumours were rife that the dollar will eventually touch Rs85. Majeed views that political uncertainty and the gap between supply and demand has weakened the Pakistani currency.

Though Majeed welcomes the measures adopted by the SBP to stabilise the currency, he believes that the importers have been further squeezed by the central bank, with reduction in advance payments against imports to 25 percent from 50 percent -- the importers were earlier allowed to buy US dollars in advance to the extent of 50 percent of the value of their imports. "The facility will now be available only to the extent of 25 per cent of the FOB (Freight on Board) or CFR (Cost and Freight) value of the goods to be imported," said the SBP in its circular.

Economists and bankers view that the rupeeís recent devaluation is a result of increase in the gap between imports and exports. As stated earlier, Pakistan's major imports comprise petroleum products and food items, and a major portion of the foreign exchange is diverted to them. Increasing prices of petroleum products in the international market have already put a dent in the country's foreign exchange reserves. Though the increasing international prices of petroleum products have affected most countries and Pakistan is no exception, the main concern of economists is its adverse effect on the industry.

The government has already increased the gas and electricity tariffs and this has hit the industry hard. People related to the industrial sector say the increasing cost of inputs has made the exports expensive and less competitive in the international market. It merits a mention here that Pakistan's trade deficit rose to an all-time high $20.745 billion in the financial year 2007-08, from $13.563 billion in the previous financial year. The 52.95 percent increase in the trade deficit has further weakened the country's already precarious balance of payment situation.

Pakistani exporters are currently faced with a difficult situation -- despite achieving the import target of $19.2 billion in the last financial year, they are expecting a tough time after the rupeeís devaluation. It is commonly believed that devaluation benefits the exporters, but this time they are unhappy because of the country's economic state of affairs. Pakistan's major exports are textile-related, while most of the textile units in the country are currently either on strike or have been closed down because of the increasing cost of inputs.

"The rupee's depreciation has not benefitted most exporters and we feel that it will only provide a temporary relief to some exporters," says Masood Naqi, former chairman of the Pakistan Readymade Garments Manufacturers and Exporters Association. He informs that only those exporters got any benefit who had received their remittance money within 15 days of the devaluation. In the long run, he adds, exporters will face a tough time, because the cost of inputs, such as imported raw material, will increase. Most of machinery used in the manufacturing sector is imported and its cost will definitely increase. "The cost of domestic inputs -- such as power, oil and gas -- has already gone up, thus the exports have been made less competitive in the international market," Naqi views.

According to the Federal Bureau of Statistics (FBS), the country's imports increased to an all-time high of $39.968 billion in the financial year 2007-08, against $30.539 billion in the previous financial year, thus registering a growth of 30.87 percent.

Pakistan imported petroleum products worth $1.623 billion in the previous financial year, followed by fertilisers ($542.4 million) and palm oil ($480.8 million). This has badly affected the country's trade balance. It is a pity that despite being an agricultural country, the country now has to import essential food items, such as wheat and cotton, which it used to export till recently. The import of wheat alone cost Pakistan $800 million in the last financial year, while the country spent more than Rs40 billion on the import of cotton, because the local varieties were attacked by pests.

There are some positive reports that Saudi Arabia has agreed to provide Pakistan petroleum at deferred payment for a year, which would give a breathing space to the economic managers to bring their house in order. Traders, however, believe that Pakistan -- being an importing country -- actually needs foreign exchange. For this, they suggest that import of luxury items should be banned and the government should give incentives to the agriculture sector, so that it could produce more wheat and cotton to reduce the import bill. Moreover, the consumption of petroleum products can be reduced by converging buses and other vehicles on compressed natural gas (CNG) and discouraging the rampant car financing.

Economists, on the other hand, are concerned about the declining investment in the country. Pakistan's stock market also witnessed a historic dip recently, while the privatisation programme has been halted and currently no foreign direct investment (FDI) is coming into the country. Actually, the investment is going out of the country. Moreover, Pakistan's foreign exchange reserves declined and reached the alarming level of $11.1 billion in June 2008, from the highest level of $16.5 billion in October 2007. In this scenario, the government needs to announce a concrete privatisation programme, as well as adopt measures to attract FDI. Moreover, it needs to reduce both domestic and foreign borrowing to stabilise the economy.

Courtesy: The News Pakistan