The Great Fall

By Amir Zia
Money Matters
The News
Monday, January 30, 2012

The prevailing political uncertainty and a grim economic and investment outlook add to Pakistan's currency woes with leading brokerage houses and banks are predicting further rupee depreciation in the days ahead

Without spending a single rupee, the net value of Pakistani depositors’ savings eroded by nearly 5.0 percent since the start of the current fiscal on July 1 as the local currency tumbled against the dollar. So has the purchasing power of every Pakistani, who earns, spends and saves in the local currency. For some leading economic experts, the sharp depreciation of the rupee remains a far graver issue for the country than the number of high-profile scandals that have been grabbing the media spotlight these days.

"The rupee depreciation is a more serious issue than the memogate scandal," says Dr. Ashfaque Hasan Khan, dean and principal of the NUST Business School. "The slide of one rupee against the dollar means that our external public debt of around 60 billion dollars has jumped by 60 billion rupees in one go. In the current fiscal, we have so far added a mammoth 360 billion rupees to Pakistan’s external debt."

Dr. Khan’s estimated calculations are based on the fact that on June 30 – the last day of fiscal 2010-11 – the rupee closed at 85.93 to a dollar in the interbank market. Now it is hovering between 90.20-90.40 to the greenback after hitting a record low of 91.28 rupees to a dollar in the intra-day trading on January 9.

Payments for oil and other imports and foreign debt servicing remain key factors that have put pressure on the rupee. The reported manipulation by a couple of banks and some leading currency players, resorting to heavy dollar buying to create an artificial shortage and then dumping them back for quick gains, also contributed to the weakening of the rupee.

The prevailing political uncertainty and a grim economic and investment outlook add to Pakistan's currency woes with leading brokerage houses and banks predicting further rupee depreciation in the days ahead. The Standard Chartered Bank sees the Pakistani rupee at 94 rupees to a dollar by the year end, while the Investment Capital Markets – a brokerage house – predicts it at 98.5, according to a poll conducted by the Jang Group for its annual issue of “Kaisa hoga 2012?”

The rupee’s sharp slide, coupled with continued double-digit inflation, has hit hard the country and its economy, including both the formal and informal sectors. It is hurting the people of low- and fixed-income groups and creating a serious challenge for Pakistan’s macro-economic stability. True, the ballooning of the external public debt in rupee terms is not the only challenge due to the currency devaluation, which has registered a fall of more than 45 percent since the Pakistan Peoples’ Party (PPP) government assumed power in March 2008. It is just the tip of the iceberg. The rupee’s fall against the dollar also means that oil prices will jump in proportion to the devaluation that further fuels inflation. If the government decides to provide subsidy to consumers on imported oil, it would widen the fiscal deficit to an unmanageable level. In any case, it is a double bind for any government. The increase in imported furnace oil prices adds to the electricity generation cost, hitting hard the ordinary consumers as well as raising the cost of production for manufacturers and service charges for most businesses. It also compounds the problem of circular debt that has swelled to 415 billion rupees, according to the Pakistan Electric Power Company officials.

Sayem Ali, an economist at the Standard Chartered Bank, said that the flawed energy policy remains a key factor for Pakistan's balance of payments difficulties and currency woes.

Pakistan has been banking more and more on imported furnace oil for electricity – a much costlier method compared with hydel, nuclear, gas-fired or other, environmental-friendly, modes of power generation. Oil imports comprise almost 40 percent of Pakistan’s total import bill. Pakistan’s oil import bill registered an increase of 39.73 percent to 7.602 billion dollars in the first of the current fiscal compared with 5.441 billion dollars during the same period a year ago.

The trend of rising import bill is likely to continue because of the massive gas shortages. Only a sharp fall in international oil prices, currently 115 dollars a barrel, can ward off the pressure. But such chances appear slim.

Shoaib Memon, chief executive of Alfalah Securities, says that Pakistan's unregulated imports, which include even dog and cat food, contributes to fuelling the dollar demand. "Pakistan suffers a huge trade deficit every year, which puts pressure on the local currency. The best short-term solution would be to go for austerity and discourage imports of luxury items."

Memon’s argument of curtailing dollar-based buying is shared by many other experts, who want the government to take difficult decisions to halt the economic rot. However, the PPP government, which has been moving from crisis to crisis, has failed to give an economic vision. With the opposition parties demanding early elections, one should not expect any bold decisions from this government now.

Memon said that Pakistan failed to expand the base of its exports and even lags behind Bangladesh, let alone other regional economic power houses. So far, record remittances from Pakistanis living abroad provided a life-line and helped keep the current account deficit at a manageable level. But in the mid- to long-run, it is exports that matter.

The outlook for the rupee appears grim as along with huge import payments, the country also has to give 4.1 billion dollars in debt servicing in the current fiscal, according to the Debt Office Islamabad.

Dr. Khan of NUST says that in the near-term, the State Bank of Pakistan (SBP) has to play its role of regulator by going after currency manipulators, who create artificial dollar shortages and demand. "Even in the free market economy, exchange rate management remains an art. The SBP must play its role and take firm action against speculators and currency manipulators."

According to Ali of Standard Chartered, the government should push for a privatisation programme, aim auctioning 3-G licenses and go for short-term borrowing as temporary measures to stabilise the currency and keep the budget deficit to a manageable level.

However, analysts say that the pressure on the current account will increase as the dollar outflows are all set to increase on the back of debt and import payments. This can lead to a balance of payments crisis sooner rather than later.

The US-Pakistan tension also affects the rupee and the overall economy given the fact that Washington remains the biggest donor to Pakistan. Given its poor record on the economic front, there appears little chance that the embattled government will be able to come up with creative, homegrown solutions to pull the country out of its deepening economic crisis. Pakistanis should get ready for tougher times as their currency remain under pressure and the government is unable to break the vicious cycle of high inflation and low growth.