foxbat
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One rupee for a cent – The Express Tribune
In Oscar Wildes The Importance of Being Earnest, Miss Prism tells Cecily: You will read your Political Economy in my absence. The chapter on the fall of the rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side.
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 Dars 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.
In Oscar Wildes The Importance of Being Earnest, Miss Prism tells Cecily: You will read your Political Economy in my absence. The chapter on the fall of the rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side.
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 Dars 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.
