Rupee appreciation Business Recorder March 17, 2014 ANJUM IBRAHIM The rupee in the open market was selling at 105.5 per dollar on 1st, 2nd, 3rd and 4th March 2014. On 5th March it was on offer at 105.4 for each dollar, on 6th March at 104.4 per dollar, on the 7th March at 103.7 per dollar, on the 8tj March 102.9 per dollar, on 9th March at 103 per dollar and on 12th March at 98.5 rupees per dollar. It went up again by the end of the week indicating that speculators may have jumped on the bandwagon again. The rupee appreciation prompted Federal Finance Minister Ishaq Dar to claim that he had fulfilled his commitment to the nation that he would bring the rupee-dollar parity to double digits. The question is which of his policies targeted to strengthen the rupee bore fruit? Dar repeatedly claimed that gold imports, which began to be smuggled into neighbouring India by Pakistani profiteers, were one of the major reasons for the rupee deprecation. A ban was placed on gold imports in January this year and it is unlikely that its impact on the rupee would have been delayed till March when the rupee quickly gained in value vis-a-vis the dollar. A Business Recorder exclusive referred to a proposal made by Ishaq Dar during the last Council of Common Interest (CCI) meeting to remove sales tax imposed by Sindh and Punjab governments on all foreign exchange transactions as a prelude to controlling the rupee depreciation. Sindh ostensibly resisted and correctly pointed out that sales tax on services is the prerogative of the province, however, given the composition of the CCI the majority opinion would invariably be carried by the government of the day and this particular proposal was approved. It is not clear whether the two provincial governments have yet issued any notification to this effect but such a proposal, even if in the works, would go someway in explaining a rupee appreciation though nothing of the magnitude witnessed this week past. Economists were baffled as to the reasons behind the recent rupee appreciation mainly because they believed that the relevant economic fundamentals were unchanged. The external value of the rupee, like any other currency, is dependent on four major factors: a rise in remittance inflows, trade surplus (or decline in the deficit), (the two indicators are components of the current account), improved macroeconomic data and international liquid reserves that include inflows from bilateral and multilateral sources as well as bonds/securities issued by the government. State Bank of Pakistan (SBP) data reveals a significant increase in remittance inflows in the current fiscal year and the steadily rising trend evident during the PPP-led coalition government has continued. Thus month wise average inflow of remittances between July-February 2014 was 1,280.6 billion dollars and 1,154.3 billion dollars in the comparable period in 2013. Again this rise is not sufficient to explain the rupee appreciation. Trade deficit declined by 4.89 percent in July-February 2014 according to the latest data released by the Pakistan Bureau of Statistics (PBS) or in total terms from 12.54 billion dollars compared to 13.18 billion dollars a year ago reflecting a 6.2 percent increase in exports and a 1.17 percent increase in imports. Again this is not sufficient to explain the rupee appreciation. And finally even though the government has been making claims of improved macroeconomic performance premised on the quarterly data released by the PBS yet few lend any credence to the sanctity of that data. Jeffery Franks, the International Monetary Funds team leader in negotiations with Pakistan under the 6.4 billion dollar Extended Fund Facility informed Business Recorder that the credibility of data provided would be evaluated by the Fund. It is relevant to note that sources in the PBS revealed to this paper that the quarterly data claiming a 5 percent growth rate is not flawless and efforts are afoot with multilaterals to improve the quality of the data. Thus few lend credence to Dars macroeconomic statistics and there have been calls from relevant parliamentary standing committees for Dar to step down as the head of the governing council of the PBS to ensure data is not manipulated. Taken together the improved performance of relevant indicators is not enough to justify a rapidly appreciating rupee. The answer to the strengthening rupee was provided by Dar himself when in a press conference he acknowledged that foreign reserves held by the State Bank of Pakistan (SBP) had increased by 2 billion dollars in recent weeks but lost his temper when a reporter asked the source of the funds and stated from a friendly country which does not wish to be named. A look at SBP website indicates that total liquid reserves on 7th February were 7.5 billion dollars out of which net reserves with the SBP were 2.8 billion dollars; on 14th February total liquid reserves were 7.99 billion dollars with net reserves held by SBP at 3.19 billion dollars, on 21st February reserves were at 8.65 billion dollars with net SBP reserves at 3.87 billion dollars and on the day of the press conference (on 12th March) Dar claimed reserves with the SBP rose to 4.77 billion dollars. The Crown Price of Saudi Arabia was in the country on the 14th of February for a three-day visit. Given the known good ties between the Sharif family and the Saudi royal family and the fact that there have been no reported talks with other possible donors, (with our major Western donors unable to keep disbursed financial assistance from the public domain according to their democratic norms) the consensus is that the money is from Saudi Arabia. However, it is not clear whether the amount is a loan and at what interest (Saudi government extends very few outright grants), or a payment for services rendered or to be rendered, which may bring into question the governments foreign policy. Whatever the terms the fact remains that this large amount has strengthened the rupee but its positive impact would be for a limited duration until and unless accompanied by reform policies that include: (i) bringing the deficit down through raising taxes by ensuring that the elite pay their due taxes, instead of further burdening the existing taxpayers as is evident in the current years budget; (ii) reducing current expenditure instead of slashing development expenditure to meet a deficit target; and (iii) improving governance not through selecting those regarded as successful but by adhering to the recruitment procedure outlined as well as following the PPRA rules when procuring. To conclude, the Nawaz Sharif dividend has paid off and the Dar dividend in terms of policies is still awaited. For speculators not to enter the currency market it is the Dar dividend that would have to deliver and given that the speculators have already upped the dollar one would be compelled to argue that they may well dictate the dollar rate in this week. Copyright Business Recorder, 2014 brecorder/articles-a-letters/187:articles/1163408:rupee-appreciation?date=2014-03-17
Posted on: Mon, 17 Mar 2014 07:07:28 +0000
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