IS CURRENT RUPEE UPSURGE OR PARITY IS SUSTAINABLE. The recent strengthening of the rupee vis-a-vis the dollar has generated considerable speculation as to whether this trend is sustainable. Supporters of the Federal Finance Minister Ishaq Dar cite his oft-repeated commitment to the nation that he would bring the rupee to dollar parity to double digits and maintain that he has delivered on this commitment indicated by the open market parity plummeting from almost 111 rupees to a dollar to 102. There is no question that the strengthening of the rupee is a favourable sign. Those who argue that a stronger rupee would make our exports less competitive in the global markets must balance this with a decline in the dollarization of our economy that was eroding the external and internal value of the rupee. The factor responsible for strengthening the rupee is not, as in previous years, due to State Bank of Pakistan interventions that involved purchasing dollars from the market to raise the value of the local currency. Unrestricted gold imports were acknowledged to be contributing to a rupee decline, however, subsequent to the ban imposed on gold imports by the Ministry of Finance the rupee to dollar parity began to improve. In recent weeks however, the rupee had reached a rate close to but still well above the double-digit parity promised by Dar. So what accounts for the rupee strengthening against the dollar? It must be acknowledged that there has been very little marked improvement in key macroeconomic indicators that account for this rise in the rupee value. The growth rate has been revised upward for the year by the International Monetary Fund – from 2.8 percent to 3.1 percent. Inflation is down due to an improved supply of food items and holding the tariff of electricity and gas unchanged for life-line consumers. FDI has improved marginally, credit off-take to private sector is also showing growth. And the government focus on improving energy supply as well as sell-off of 3G & 4G spectrum licence cumulatively would lead to an improvement in dollar inflows as confidence/perception of the economy improves. Exports have not risen significantly though it stands to reason that the Pakistani team pointed out to the IMF team during the second review of the Extended Fund Facility that exports would increase by a projected billion dollars due to the grant of GSP plus status by the European Union. A rise in exports would reduce the trade deficit and that would have a significant impact on the rupee value. The fact that Saudi Arabia has extended a grant/loan of 1.5 billion dollars would also contribute positively to our reserve position with a positive impact on the rupee value. Remittances have on average as per seasonally adjusted series been higher each month in the current fiscal year compared to the previous years and that too would have had a favourable impact on the local currency. However, economists argue that the reason behind the recent improvement in the rupee to dollar parity is related to the government of Pakistan’s request for deferred oil payment facility – an import item that alone accounted for over 13 billion dollars last year. It has been reported that the government has requested from Saudi Arabia and Kuwait a 180-day deferred facility or up to six months. If this facility is granted, as is expected, then this would pass the buck onto next year and the Finance Minister no doubt would hope that by next year exports would pick up reducing the trade deficit which, in turn, would keep the rupee strong. Presently, the inflow of dollars both on ready as well as forward swaps is due to hoarders (exporters and investors) of forex liquidating their dollar positions. This has helped the country to meet its Net Investment Reserve (NIR) target as well as forward swap limits fixed by the IMF for March to be comfortably met. Be that as it may, there has been no public announcement to this effect yet and unless this is followed by a public announcement optimism may be replaced by pessimism with a consequent impact on the rupee value. Additionally the government of Pakistan is not due to make any major payments this month – neither for oil imports nor for repayment of the IMF 2008 Stand-By Arrangement. With reserves therefore expected to be stable for a few weeks the rupee value has strengthened. To ensure sustainability of the rupee value it is imperative for the government to take measures that would strengthen the reserve position, reduce its reliance on heavy borrowing from either the State Bank or banking system and increase its revenue from direct taxes rather than from indirect taxes and reduce the fiscal deficit on sustainable basis. A strong currency it must be pointed out, would not only attract foreign investment but also reduce internal inflation and reduce our import bill in rupee term. We need to improve SBP’s Net Foreign Assets based on exports of goods and services and not indulge in more borrowing in dollars or rupees. Purchasing oil on credit just amounts to kicking the can down the road which ultimately requires payment. Business Recorder
Posted on: Sun, 13 Apr 2014 02:57:28 +0000
Trending Topics
Recently Viewed Topics
© 2015