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After witnessing stability in last fiscal year (2010-11), the rupee exchange rate remained very volatile during this fiscal year (2011-2012) and lost 7.8 percent against US dollar. Besides the first 10 months of current fiscal year, most of the volatility has been observed during last fortnight, during which Pak rupee depreciated by 2.5 percent against greenback.
Panic in the currency market began when the loan repayment of $400mn to the IMF was made. Furthermore, the SBP Governor's interview to a foreign newspaper regarding 'State of Pakistan Economy' also put pressure on Pak Rupee, economists said. In the interview, the Governor SBP has predicted a huge stress on the economy and likelihood of foreign exchange reserves melting down due to IMF repayments. "Furthermore, there are speculations in the market of further depreciation and the exporters have started to wait on their proceeds, while importers want to book exchange for their upcoming imports," they added.
Fundamentally speaking, the odds have favoured the rupee depreciation, said Muzzammil Aslam, an economist at JS Global. "We believe that higher government borrowings from the SBP and the scheduled banks coupled with lower foreign flows has substantially lowered the Net Foreign Assets and Net Domestic Assets ratio, resulting in increased pressure on rupee-dollar parity," he added.
Pakistan's inflation has stayed in the double digits consecutively for the fourth year, which is way higher than its trading partners, he said and added that simple economics rule of Real Effective Exchange Rate (REER) clearly indicates rupee devaluation. Pakistan is expected to post a current account deficit of around 2 percent of GDP at the end of this fiscal year and financial account is also set to post deficit due to slowdown in foreign investments and disbursements of external loan, he mentioned. "We believe, FY12 was tough in terms of foreign flows as throughout the year the global economy was grappled with Greece and Euro debt crises and the slowdown in the US economy," Muzzammil said.
Resultantly, Pakistan failed to attract any substantial investments and missed the budgetary targets of floating Eurobonds, exchangeable bonds and the auction for 3G Telecom license, he added. In addition, unfavourable terms with US due to Salala border post incident and halt of Nato supplies have significantly hit budgetary projections.
On commodities front, higher international oil prices have hit Pakistan's import bill and additionally, the government's decision of importing one million tons of urea has also hit the exchequer, he elaborated. While, on export front, decline in cotton prices have also put pressure on the overall exports of the country. To add to this, unfavourable wheat and sugar markets have also restrained the government to export the surplus stock of both, he said.

Copyright Business Recorder, 2012

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