Decrease comes amid currency devaluation by many countries. CREATIVE COMMONS
After almost one-and-a-half year, the Pakistan government on Monday allowed the rupee to shed value against the dollar in inter-bank trade, restricting the central bank from stopping the decline, dealers said.
Rupee declined 2.55% to Rs104.10 at close of the inter-bank exchange trade, coming down from the Rs102 a dollar where it was capped since early 2014.
The development comes at a time when economies around the world are devaluing their currencies in what is being termed as a low-intensity trade war in a slowing global economy.
“Rupee is going to go down further in next few days. Apparently, the government is under pressure from exporters. But it could be devastating if it is allowed to float freely,” said an exchange dealer, refusing to make any predictions to where the devaluation will halt.
The rupee was already getting hammered in the open market, but that was attributed to increased demand on account of pilgrims proceeding to Saudi Arabia.
The devaluation is interesting in Pakistan’s case where just last week the State Bank of Pakistan (SBP) reprimanded exchange dealers for letting speculators batter the rupee in the open market.
Zafar Paracha of the Exchange Companies Association also concurred that SBP allowed the rupee-dollar exchange rate to decline with the consent of the government.
“On one hand, it threatened us with money laundering charges for perceived manipulation in the open market and on the other end they are devaluing it. This policy is incomprehensible for me,” says Paracha.
While the rupee’s decline was in consequence of similar happenings in regional economies, he warned that the repercussions on Pakistan could be severe.
“It’s understandable that manufacturers would want this to happen but why penalise the entire country.”
Pakistan exports plunged 17% across the board in July 2015 over the same month of the previous year. The textile group, which is the largest contributor to the country’s exports, saw a decline of 12%.
Recently, former finance minister Hafeez Pasha said that the rupee would have to shed 6% in value or the government would have to give 4% rebate on the value of exported goods to compensate for the rise in cost.
Representatives of textile associations also met Commerce Minister Khurram Dastgir in Islamabad during a meeting of the Federal Textile Board to present their concerns. There were mixed reactions after the meeting.
“This devaluation has come too little, too late,” said Shabbir Ahmed, chairman of the Bedwear Exporters’ Association. Decline of rupee in one go will only intensify demands from foreign buyers to share subsequent gain in margin of manufacturers, he said. “They should have done this slowly and gradually.”
Federal Minister Dastgir made no commitment on the question of rebate on utility prices, which exporters say are exorbitant in Pakistan compared to their competitors, he said.
Representative of towels exporters, Mehtab Chawla, who also attended the meeting, said he saw textile exports declining over next few months.
“Exchange adjustment or any other step doesn’t have an impact overnight. It’s a long list of to-do things before we see any meaningful impact on trade.”
Some experts believe that the government should not blindly follow other countries, which have completely different economic landscape than that of Pakistan.
Former National Bank of Pakistan (NBP) president Ali Raza says Pakistan is among the few lucky countries that won’t be affected by the recent global economic events.
“Our exports don’t depend on China alone. Barring rice, cotton and yarn, we are also not among primary commodity exporters. What we receive in remittances and export proceeds should be enough to compensate us in the aggregate sense.”
Worse-hit countries are those where foreign director investment and foreign portfolio investments play a major role, he said.
“Pakistan is on the periphery, so we shouldn’t be too worried about it.”
Published in The Express Tribune, August 25th, 2015.
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