As we near the end of the incumbent, democratically-elected government’s tenure, led by the Pakistan Peoples Party (PPP), and look forward to elections in 2013, one cannot escape a common question asked by many: “Are we better off now than we were five years ago?”
Many pro-Musharraf elements would claim that the Pakistani economy has weakened since he departed, with rising prices and the incessant energy crisis crippling the entire economy. Those who would like to see the things through the PPP lens will come up with a long list of achievements, especially in terms of constitutional reforms, maintenance of the freedom of media and judiciary, and improvement in the law and order situation, at least in the Punjab province.
While a number of businesses have done well even in the crisis-hit economy of Pakistan, it is a legitimate question to ask how the national currency has performed over the tenure of the present government. The question is necessarily related with the monetary policy the central bank has pursued in the recent past.
When the present government came into power, a US dollar and a British pound were worth Rs78.92 and Rs115.18, respectively. On December 31, 2012, the exchange rate between the rupee and US dollar and the British pound stood at Rs97.18 and Rs157.13 respectively. In other words, if someone had converted Rs1,000 into US dollars on January 1, 2009 (for an exchange rate of $1 = Rs79.08 on the day), and kept $12.64 to convert them back into rupees (Rs1,228.89) on December 31,2012, they would have made a profit of Rs228.89 (an accumulated return of 22.89% over a period of four years, or average annualised return of 5.72%). Similarly, if someone had converted Rs1,000 into British pounds on January 1, 2009, they would have had an accumulated return of 35.60% over the four-year period (or an annualised return of 8.9%) on converting back their pounds into Pakistani rupees.
Conversely, a foreign investor will have lost 22.89% (on its investments in rupees from the base currency of the US dollar) and 35.60% (if the investments into rupees had come from the base currency of British pounds).
This is an interesting scenario, as it may lead to the conclusion that Pakistan rupee is not worth what it used to be. It is certainly true that the Pakistan rupee is constantly losing its value against other major currencies of the world, but the depreciation of the rupee has actually helped a number of business sectors in the country. In fact, the Karachi Stock Exchange (KSE)-100 index provided equity investors an annual return of 48% in the calendar year 2012, with the textile sector generating an annual return of 99% and cement industry returning 152% return during the year. While there are a number of reasons for the excellent performance of Pakistan equities, foreign demand and the weakening of rupee are cited as two interconnected factors.
A rupee is worth a rupee only when the business it is invested in generates a rate of return higher than the inflation rate. For example, if someone had invested one million rupees in the KSE100 index on December 31, 2008, they would have theoretically had Rs2,881,500 in nominal value of their investment on December 31, 2012 – an accumulated return of 188.15% (or an annualised return of 47.04% during the four-year period). The above calculation is based on the increase in KSE100 from 5,865 points on December 31, 2008 to 16,900 points on December 31, 2012. It is clear from the table above, that inflation, albeit very high in the last four years, could not erode all the value generated by the stock performance on the Karachi Stock Exchange. If this is taken as a rough indicator of the business performance in the country, it is fair to conclude that the Pakistani rupee, in a holistic sense, is worth more than what it had been. It is only simplistic observation by laymen and some commentators with vested interests who are trying to portray that all is doom and gloom in the Pakistani economy.
THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY
Published in The Express Tribune, February 25th, 2013.
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COMMENTS (12)
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Very low scholarship used in this article--this is what happens when one is forced to write bonhomies on behalf of their masters.
Based on this moronic logic, we can depreciate our way to immense prosperity! This is pure poppycock. We have a gaping trade deficit which means we earn less forex than we spend. If it were not for overseas Pakistanis like us who send billions back to the motherland to be wasted away by the idiots in charge, the "shop" would have closed a long time ago!
I would really like to see this Dr. Dar's degree from Cambridge. As a matter of fact, I am going to check the university's records to see if this guy ever set foot on campus!
@Dhaka: nobody from abu dhabi pledged anything. it was a signing ceremony of non binding MOU for cooperation. a photo used by malik riaz to gain weight. and iran pakistan gas pipeline is last resort to become political shaheed otherwise, why wait for 5 yrs for this project.
Doesn't the saying go like all that glitters is not gold, not the other way around?
I don't think that PPP government is bad.Zardari has a vision for the country. Otherwise why abu dhabi group pledge 45 billiion dollar investment,proposal for iran gas pipeline etc.It's not a political stund.They will come into power next election as well.
@Jawed Ali: If you don't care value of rupee,then your imports of oil will be more expensive and ultimately that burden will be hand over to poor people by paying high price for every thing from salt to jet engines.Pakistan is not an export oriented country, so to get more profit on exports by weaker rupee.Feel that pakistan future is quiet gloomy in every aspect !!!.
Well, I don't care what a rupee woth now or in past. If someone can't feed his family or buy them a standard living, then this comparison is meaning less to them. For ex-pats it may be a good indicator that they have to send less $$ back home but for common man in Pakistan its a race for survival. Please tell us something that has a meaning for common man and don't try to allure us that PPP government has done something good.
Historically for several years and looking on graphs,pakistan rupee always declining linearily and this trend will continue for ever in future.By statistics, every 3 month decline of 1 or 2 rupee against dollar,means in a year around 8 rupee decline.By year 2020, it can decline 200 rupee a dollar,horrible!!
With Rs19.17 trillion injected into Banking in the last 13 months, along with lowering interest rates, why would KSE100 care what the real economy is doing? Plus, even the IMF is saying that the Rupee is overvalued by 10%. I wonder if IMF is assuming that 10% overvaluation with or without the buildup of $6.4billion liability buildup in the Forward contract and SWAP positions of State Bank.
Also, I've never read currency value being computed this way. Usually, it would be computed as an increase/decrease in (Exchange rate (USD/PKR) x CPI(US) )/CPI(PK).
As a student of Finance, could you help me out and point me towards an academic discussion of the approach you've followed?
"If this is taken as a rough indicator of the business performance in the country" - Isn't this a fairly major assumption? (1) While the The KSE100 index provided high returns, inflation affected the entire currency in circulation. What is the market cap of KSE100 firms as a percentage of the total money supply? (Of course other businesses might have even superior returns, if so the author's opinion gains more validity - but it seems at least the public sector units haven't been as successful). (2) It appears that the stock index composition is biased towards exporting firms. It seems like the fortunes of importers is not adequately reflected, and certain media reports (like textile firms holding back dues to power firms) suggest that the performance of the exporting firms has been boosted by holding back payables.
The KSE has little link with the wider reality of the Pakistani economy. A handful of firms make up the Index who benefit from SRO's, state support, both overt or covert. That said, argument on the value of the rupee is well taken though.