Fiscal 2011 review: Rupee rewrites recent history, falls only 0.5% against dollar

Interest rate rose in first six months but left untouched since.

KARACHI:

The rupee depreciated against the dollar by just 0.5 per cent during fiscal 2011 against the average depreciation of seven per cent in the last five fiscal years.

Major determinant factor was the external account that kept rupee stable against the greenback, according to Topline Securities research note.

After a lapse of seven years, the country’s current account is expected to show a surplus of approximately $100 million, adds the note. Current account stood at a surplus of $205 million in the first 11 months of the current financial year against deficit of $3.4 billion in the same period last year.

The primary reason for the improvement was 27 per cent rise in exports to $23 billion on account of favourable cotton prices, 25 per cent surge in worker remittances along with Coalition Support Fund inflows of $743 million.

Discount rate increased by 1.5%

The floods along with persistent problem on the fiscal front, spilled over in terms of excessive government borrowing from the State Bank of Pakistan and higher inflationary pressures. This forced the central bank to opt for a tight monetary policy stance, says the note.

During the first half of the year, outstanding stock of government borrowing rose to Rs1.5 trillion by December from Rs1.2 trillion at the beginning of the year while inflation stood at 14.6 per cent.

Consequently, advocating a proactive approach the State Bank raised the policy rate by 1.5 percentage points to 14 per cent during the first six months of the financial year.

However, during the second half improved external account provided much-needed respite. Improved net foreign asset composition in the reserve money helped the government curtail inflationary budgetary borrowing from the State Bank.

Furthermore, taxation and austerity measures announced by the government in March, also indicate convergence of fiscal with monetary policy. Thus, in light of the two developments the central bank opted to keep the policy rate unchanged in the second half.

So far in the current financial year, yields on six-month treasury bills rose by 1.45 percentage points to 13.75 per cent while those on 10-year Pakistan Investment Bonds increased 1.42 percentage points to 14.1 per cent.





Published in The Express Tribune, June 28^th, 2011.