Amidst the revelation of the true face of the global crisis, soaring apprehensions on the ground are rooted in finding out what one’s deemed fate would be. Are Pakistani exports well buttressed by inelastic demand to sustain severe dips in overall global consumption? Others concerns interrogate about imports, capital in/outflows and more importantly debt servicing. Notwithstanding the importance of these factors in prediction of the growth direction, the real determinant of ‘what is to become’ lurks in the equilibrium, that is, the exchange rate; the price that would finally derive the magnitude of the export revenue and payment obligations simultaneously.
Over the last two months, weighted average exchange rate (WAR) has stood at Rs86.57/USD at the end of Jul-11, Rs85.51/USD at the end of Aug-11 while as of 24th September, WAR was recorded at Rs87.71/USD. While these fluctuations may be deemed minute, an increase of 130bps does seem a little far from insignificant, especially when the overall fluctuation in FY11 stood at 50bps. At the outset of declining international cotton prices, inelastic imports and projected the sustainability of exports and subsequently the exchange rate remains precarious.
The silver lining, however, deserves to be discussed first. It seems that overseas Pakistanis have turned a new leaf of generosity by remitting more than $1 billion every month. While the government lauds its initiatives with respect to formalising and facilitating money-remitting channels, research houses are issuing caveats pointing towards funding of anti-state activities. Nevertheless, one does wonder that with the rest of the world growing poorer, ‘Pakistanis’ abroad seem to be prospering considerably, having finally ‘realised’ the responsibility towards their kin at home to such an incredible extent.
Moving on to other mundane issues, the Pakistani government in all its might has decided that it does not wish to renew its relationship with the IMF. Reflecting on the latter’s assistance in yesteryears reveals that out of $8.9 billion owed to the IMF currently; $6.9 billion was advanced to the SBP for reserve replenishment which currently stand at more than $17 billion. With the first dent to this buildup set to occur next year with principal and interest payments amounting to $1.39 billion, it remains to be seen how far remittances will be able to sustain a stable exchange rate. Apparently, the onus of an expected deterioration in the balance of trade also lies upon the much welcome remittances. However, the saving grace may lie in the current bout of floods, wherein 2.5 million bales of cotton similar to last year have been destroyed. This can be expected to weigh favourably for the exchange rate position, as the recently slumped international prices will be pulled up by the shortage in Pakistani cotton.
More good news for Pakistan lies in the world’s miseries. With the developed world engaged in its fiscal worries, the price of oil, Arab light in the case of Pakistan has slumped from $112/bbl in the beginning of the current month to around $102/bbl as of Sept 23rd. If this trend continues, then some respite can be expected on the petroleum imports front, which currently comprises more than 35 per cent of the total import payments.
Thus, all may not be bad on the exchange rate front, atleast for now. However, the condition of external dependence continues to prevail and little efforts are made towards a real change in the economic structure even though its significance is more widely known now. Notice how the economy and its nominal variables seem to thrive when international factors deem so?
The writer is an economic researcher and freelance financial journalist
