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The rupee is presently being traded at around Rs104 to a dollar in the open market and at around Rs101 in the interbank market. The country’s falling foreign exchange reserves and current account deficit continues to widen keeping the rupee under pressure. Since inception of new government in June, the rupee has witnessed a rapid devaluation of about 2.4 percent. It means within two months. Though International Monetary Fund (IMF) agreed last month to provide a new loan of over $5 billion to the country, yet the deal could not help strengthen the rupee, which is currently in a free fall. Local dealers term the currency market crisis as serious as the energy crisis in the country.
The State Bank of Pakistan did not intervene in the market and allowed rapid depreciation of rupee. Some analysts believe that non-intervention of the country’s central bank in the market operations denotes that the central bank has allowed the rupee to slide against the greenback in a move to boost exports. The gains on export front, however, will be short term in a country where export-oriented industries heavily depend on imported raw materials. The decline in exports is also witnessed in terms of rupee despite the fact that the massive depreciation of the rupee against the US dollar in last fiscal year. This shows that the depreciation did not support Pakistani commodities to penetrate in the international markets. Local textile makers are concerned over the continuous depreciation of the rupee that has increased production cost of export goods, making their products uncompetitive in the world market. The rupee slide has made the imports particularly the oil imports, costlier.
Devaluation of rupee against all major international currencies is the reflection of weakness of the economy. The analysts believe that weak economic fundamentals and slowdown in foreign investment has actually brought the rupee under pressure.
The country missed the economic growth target of 4.3 percent set for last fiscal year, which ended on June 30, as the economy grew only 3.6 percent. During the five-year tenure of the former government of Pakistan People’s Party (PPP), the real gross domestic product (GDP) growth averaged at 3 percent against the required rate of 7 percent. This was revealed in the Economic Survey of Pakistan for the fiscal year 2013-14 presented on June 11 by Finance Minister, Ishaq Dar. Dar stressed the need to make harsh decisions for the betterment of the country’s economic conditions. He vowed to revive the economic growth.
During the four years of former coalition government, led by former Prime Minister Yousuf Raza Gilani, the rupee registered 46 percent decline since March 25, 2008 when it was traded at Rs62.61 to a dollar. The rupee had been stable since the former government received the first loan tranche of $3.1 billion sanctioned by the IMF in November 2008, but increased demand for dollar by importers over the past four years has taken its toll on rupee’s health.
A sliding rupee has increased the amount owed on foreign loans. The erosion of rupee is likely to have repercussions for the government’s total debt, which would automatically increase because the public debt is presented in the rupee terms. The experts believe that devaluation of one rupee causes Rs60 billion jump in the public debt burden. A hugely indebted nation could face serious problem in meeting its budgetary targets and the interest repayments in the current fiscal year ending June 30, 2014. The former government continued to borrow from commercial banks particularly through Term Finance Certificates (TFCs), Pakistan Investment Bonds (PIBs) and treasury bills (T-bills). The large fiscal deficit has resulted in a sharp increase in government’s domestic debt, which recorded an increase of Rs1.2 trillion during July-March 2012 to reach Rs7.2 trillion. Gilani government betrayed its commitment to keep borrowing from the central bank at zero level on quarterly basis as its borrowing increased from the central bank by end of third quarter of the last fiscal year.
The depreciation of the rupee has caused rise in the country’s public debt. The Economic Survey 2013-14 revealed that total size of the country’s GDP touched Rs22.909 trillion in the outgoing fiscal year. As percentage of GDP, domestic debt therefore stood at 38.4 percent, while foreign debt accounted for another 21.2 percent. Public debt as a percentage of GDP had already reached 59.5 percent by end-March, compared to 59.8 percent during the same period last year, according to the survey. During July-March 2012-13 period, the domestic debt stood at Rs8.796 trillion, higher by Rs1.159 trillion over the previous year. On the other hand, external debt stood at Rs4.831 trillion during July-March 2012-13, lower by Rs200 billion as compared to end-June 2012. Foreign currency debt in dollar terms stood at $49.1 billion till March 2013.
The Finance Minister, Ishaq Dar has already announced in the budget that a reduction of debt by 2 percent would be made every year in overall public debt which is presently 63 percent of the gross domestic product (GDP) and way above the 60 percent permissible under the fiscal debt and responsibility law.
The growth of per capita income depends upon stability of the exchange rate. The country’ per capita income, calculated on the basis of an exchange rate of Rs61.30 to a US dollar, increased from $926 to $1,085 in the fiscal year 2007-08. The currency’s strength against the US dollar was instrumental to push up the per capita income in the year 2007-08. Presently rupee has depreciated to around Rs101 to a dollar, which means negative growth in per capita income.
Increased remittances from Pakistanis working abroad supported the rupee and shielding the currency from a sharp fall but the increased dollar demand continued to push the rupee lower.
The persistent depreciation of rupee is likely to fuel inflation, which will not only hit the poor hardest but also affect all segments of the economy. The poor and the lower middle class find it increasingly difficult to make both ends meet with soaring prices of essential commodities including foodstuff. The poor are highly sensitive to the price changes in food, particularly staple food items. Households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children’s education.