So they do if you watched the scary talk show hosted by Kamran Khan on the evening of December 18. Mr Khan went on to unearth a conspiracy behind the fall of the rupee. As I wrote this column on the morning of December 19, one Pakistani rupee equalled 0.0102 US dollar or approximately one cent. For the same rupee on March 25, 2008 — when Mr Yousaf Raza Gillani was sworn in as the prime minister — you could get 1.58 cents. There has thus been a substantial depreciation of the rupee.
What it shows is that the rupee is demanded far less compared with the dollar. This is happening because the inflow of dollars through exports, foreign assistance and remittances by Pakistanis are unusually less than the outflows in the form of import payments and debt servicing. As more and more payments have to be made out of foreign exchange reserves, the confidence in the rupee begins to dip. With greater movement out of the rupee and into the dollar, the former depreciates further. Consequences include an increasing cost of debt servicing in terms of rupee and expensive imports. Speculators jump in to make a killing, something that smacked of a conspiracy to Mr Khan. This may well be, but to blame it on the lack of regulation of foreign exchange companies amounts to misunderstanding the issue. A proper regulatory framework is as necessary for exchange companies as it is for the stock market. Again, to blame a statement given by the State Bank governor to the Wall Street Journal for the rupee muddle is as needless as blaming Mr Ishaq Dar’s speech as finance minister for the economic disaster that he was talking about. The market is ahead of such speeches in terms of information. The economy in general has been downhill since the final year of the government of General (retd) Pervez Musharraf and the rupee depreciation is part of this.
So, what went wrong in the short run? In the first four months of the current year, there was a surplus in the external account. And yet, the rupee depreciated by 3.3 per cent. There has been a compression of imports and exports increased because of high prices of cotton in the world. Higher remittances made their own contribution. All this was not enough to keep the rupee stable because debt repayments to the IMF and others have been made more burdensome because of depreciation and the deceleration of inflows of aid and virtual drying up of foreign investment. From 7.2 per cent of GDP in 2006-07, these inflows have slumped to a mere 0.7 per cent of GDP. And it continues, causing a rapid decline in foreign exchange reserves from $10.8 billion at the end of June 2012 to $8.6 billion on December 14, 2012. Inflation is coming down, though this is more a sign of recession than stability. It is still too high to allow any benefit of depreciation to exports. In this environment, reducing interest rates did not make sense. It only decreases the incentive to hold rupee assets. It is precisely due to these recessionary signs that the private sector demand for credit has been lukewarm, despite the rapid reduction of the policy rate since the installation of the present governor. So, this governor or the next, the rupee will have a hard time so long as we expect the world to keep bailing us out.
Published in The Express Tribune, December 21st, 2012.
COMMENTS (21)
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@Enlightened: Dear Enlightened, I would not argue with anything you have said, except for a few Rs here or there, and of course military spending every were is a fudged secret. However, although different figures are produced It does seem that Pakistan military spending is about 31.6 per cent of the Annual Budget, interest amounts to a third, and the last third is used to run the whole of Pakistan. These are rather terrible figures, although Britain spends about 36 per cent on defence and the US spends about 52 per cent on defence. People everywhere are suffering because of these insane amounts of money being spent on so called defence. I do not know what the answer is, because these insane defence budgets have been around since the early twentieth century. Perhaps a little sanity will start to creep into the brains of our world leaders eventually, but I do not think we should place undue reliance upon it happening.
@Mirza: You have a point regarding high defence expenditure by Pakistan on missiles, nuclear arsenal and other military infrastructure to match Indian defence capability which is more orientated towards China than Pakistan. Though on paper, Pakistan spends around four percent ie Rs 800 billions on its defence budget but according to US defence analysts it is much higher than this figure whereas only one percent each is spent on education and health respectively. Pakistan has already spent one billion dollars on arms import this year and it only knows how much has been spent on adding to its nukes tally which is estimated to be 120. The military gets what it wants at the cost of its failing economy which is one of the major cause of falling value of rupee against dollar but yet fails to deliver in its primary duty of internal security as thousands of innocent people of been killed by TTP but it is pinning blame on the civilian govt and political parties for their failure.
@Mirza:
Of course spending on defence means that money cannot be used for other things: health, education, rural roads and so on. This is the familiar "opportunity cost" argument.
I don't think people avoid the topic; it has been written about many times.
a weak rupee will mean better competitive pakistani goods the best way to force companies to increase there deletion(indigenization)
@gp65: As most anyone who has followed Pakistan closely knows that musharraf started losing his grip in 2007 and by the time the elections results were in, he had basically retreated into his hideout within the presidency. Musharraf had little, if any, input in the policies from March 2008 to August 2008, when was formally ousted whose signs were apparent for months leading up to August. Your claim that the debt to gdp ratio has remained is sheer false. The debt, in dollar terms, has doubled since Feb of 2008 and has more than trippled in rupee basis. Unless you are telling me that Pakistan's gdp more than doubled in dollar terms, your assertion cannot be true.
Excellent contributions from many people. However, looking at the Pakistani Rupee from a different angle I have noticed that prices around the world have risen at an alarming rate. At one time petrol in the UK was about one shilling a litre, and now it is about 1 pound fifty a litre. In most Western countries electricity has gone up about 100 per cent in less than two years. We have inflation folks. Now I know that the depreciation of the Pakistani rupee from 1 rupee to 1.58 rupee to the US Dollar (almost 60 per cent) in less than 4 years is alarming, but I would say that Pakistan has severe problems outside of its control, and I will not go into them. However, that just means that the Pakistan Government has to work a little harder at its economic. The Pakistan Government has my sympathies, though, because when one looks at European countries such as Greece, Spain and a few others one could criticize them somewhat more harshly. For some reason the world economies are going through a hard time, and I do not know what the answer is.
@meekal a ahmed: I have a lot of respect for you and other scholars including the writer. Can anybody please let a layman explain how a third world country with tiny economy can afford the huge army, WMD and latest missiles? USSR tried to compete with rich USA and imploded. We are trying to do that with a much bigger economy like India and what would be the result? Is there any country in the world which has similar policies and wastage on non productive activates and still survive? I am waiting for some Op Ed and discussion on this elephant in the room that nobody sees. I am not being critical but want experts to take up the forbidden subject of what is keeping Pakistani people poor? Best regards, M
@Falcon:
In the "short-term" we have high fiscal deficits?!
Oh dear.
We have had high fiscal deficits for some five years now -- the last clocking in at 8.5% of GDP. If you measure it correctly, it was closer to 10% of GDP.
What it will be in FY13, no one knows.
This deficit, which we talk about as if it is just an abstract number, is the root cause of all that be-devils the economy. It is probably true in the case of most/all economies. It stifles growth, causes high inflation, crowds out the private sector, and the most dangerous part, it spills over into the external sector and causes balance of payments problems which, unless checked, will lead to another full-blown crisis.
A repeat of 2008.
We cannot, sadly, print dollars with the same gay abandon that we print rupees.
The next crisis, is a matter of timing: not whether, but when.
@gp65: I agree that theoretically depreciation is supposed to help exports but in Pakistan's terms, most of the exports are in undifferentiated low technology segment, where the competition is already very high on price point. Most of the people who I have talked to that are interested in sourcing from Pakistan are always more concerned about high levels of uncertainty as compared to minor price differentials. Secondly, Pakistan's key problem is that we have very high level of import reliance for raw materials. Most of our import bill is made up of imported energy sources (such as oil) that is not price sensitive. Consequently, our exports remain at the same level but imports go up in case of depreciation widening the trade deficit. As for depreciation affects on fiscal deficit, it takes some time for inflation to percolate through economy (avg. 18 months). This means our revenues won't scale at the pace of net interest dues in dollar terms (assuming tax-to-GDP ratio remains the same). What that means that in the short-term, we will have high total fiscal deficit because of higher portion going to interest payments.
@MSS: You are discounting the benefits for exporters of a weaker rupee, especially during a time of rising commodity prices and stiff competition from our competitors. As our Western markets face grim economic times, our exporters face even more pressure to offer a competitive product. In % terms the Bangldeshi Takka, Sri Lankan Rupee and Indian Rupee have depreciated by a much larger amount, making it even more difficult for us to compete.
@Nadir, A weak Rupee is a real problem when balance of payments is in focus. You have to pay a lot more Rupees for the same amount in Dollars wiping out any growth in a small (in dollar terms) economy. Pakistan's imports are larger than exports. So the foreign exchange reserves shrink. But for remittances by workers abroad, Pakistan could be in a danger of defaulting on BoP.
We surely are progressing! Next stop Rs. 1000 for a dollar. Pakistan Zindabad & Paindabad!
Let us face it: the economic team of Pakistan has failed the nation. They should be removed ASAP. The economy is in tail-spin and there is no job creation to meet the needs of the youth entering into job market. Five years wasted
@Lala Gee: Musharraf was President until August 2008 and IMF program happened in Nov 2008. Are you saying that the balance of payment crisis happened in just 2 months and did not have anything to do with the economic management under Musharraf? The inflation throughout 2008 was 20%+. Did that have nothing to do with economic management under Musharraf? Nominal debt has doubled but so has nominal economy, so the debt to GDP ratio has not really worsened under this government.
As for the author pinpointing the reasons : HE has clearly mentioned some - 1) Undue lowering of interest rate which reduces the desire to keep savings in Pakistani currency. 2) Security situation has led to precipitous fall in foreign direct investments in the country. 3) Reduced inflow of foreign aid The other reason which has been discussed threadbare in other related posts: 4) Circular debt related subsidy is driving up fiscal deficit which indirectly increases inflation and makes exports less competitive and load shedding is driving down exports directly by reducing textile production.
As I have said repeatedly, criticism and finger pointing is the easiest job, and should be left for the laymen only. The professional people's job is devising solutions, not the finger pointing. I don't think anybody has slightest doubt about the incompetency of the current government, and also hopes for betterment. As an outsider experts, and to prove your expertise, you are required to pin-point the errors made and the ways to correct them, not simply to state figures and statistics, which perhaps is better suited to a news reporter.
@Author:
"The economy in general has been downhill since the final year of the government of General (retd) Pervez Musharraf and the rupee depreciation is part of this."
Your above statement is bit misleading. The minuscule economic downtrend in Musharraf's last year was the result of political unrest caused by his few blunders and the future game plans of a super power, not the economic mismanagement by his team. If you remember, the rate of growth was still more than double than present, highest foreign currency reserves, Rupee didn't lose a fraction, less than half the current debt, and no IMF program.
@Falcon: Directionally I agree with you. But I wanted to point out a couple of facts: Fiscal deficit is based totally in local currency, so impact of depreciation is not seen there. Also depreciation encourages exports and discourages imports, so actually helps to reduce trade deficit. The inflationary aspect of depreciation of course is undeniable.
Most of the points you suggested including improved security and greater investment are only possible in medium term , not short term. Pakistan will definitely need one more IMF injection whoever the next PM - and that will not be possible without a nod from US. So Imran's ability to defy US will be limited by this ground reality.
One final point: while it has been claimed elsewhere that Karachis stock exchange grew at highest rate powered by the interest rate reduction, those are in rupee terms. The dollar growth which would net out depreciation would certainly not put out such a rosy picture.
A stronger Rupee is beneficial because??? national pride? What does the strenght of the rupee suggest? A strong economy? Nonsense, the Japanese Yen gained so much against the US dollar over the past few years, has Japan come out of its 2 years of near depression rates of growth no? Rs. 60 = $1 is no magic benchmark for economic success.
PT,
I am surprised that as an economist you declare the economy to be in "recession". Is a real output growth of 3% set against monetary expansion of 14.7% (despite the fall in NFA) strike you as recessionary?
A more accurate and technically correct way to describe the economy is that it has been in the grips of "stagflation" for almost the past five years and as far as I can tell, there is no end in sight -- at least not with current policies.
Well. Look athe huge benefit. 1 cent = 1 Rupee. Calculations are much easier. That will suit many almost illiterate politicians who otherwise can't do much arithmetic. Ha Ha.
Informative article. I think rather than using cosmetic measures such as interest rate changes, govt. should strive for fundamental structural reforms in taxation, law & order, and energy sectors. Interest rate movement might benefit few big players in the market but the fundamental issues affect all, most importantly SMEs who are the engine of growth in any economy. Having said that, we should not under-estimate this continuous depreciation of rupee, since it starts a vicious cycle of inflation, high interest payments, high fiscal deficits, and high trade deficits. It seems like we will have to reach out to IMF sooner before Rupee goes in free fall.