Enough? Or is it just the beginning?
So when the titanic hit the glacier it sank like a rock, and in perhaps less suited analogy the Pakistani rupee sank low against the US dollar, should we assume nothing less as fate of our economy? The dollar appreciation and rupee freefall is not a new phenomenon for us Pakistani commoners, especially when we have little idea who is driving the economy. That said, we would surely like to know where the rupee is headed on a sound technical basis. We would also like to know why did we not see the dollar hitting Rs112 in the open market, why is our rupee losing its grip against the dollar, who is responsible for ramming the economy into a solid rock, and not to miss the million dollar question: is it going to sink? What’s next?
Painful past
Briefly we make our rupee attractive using short and long term economic levers. If the economy is doing well, rupee is a darling, and if the economy is struggling then the its value drops against other currencies, mainly dollar. Then there is the role of State bank of Pakistan (SBP) which through its mechanism ‘manages’ the rupee depreciation and tries to keep it within the safe zone, preventing freefall. The SBP wants to keep rupee competitive and not attractive. If you wonder what the difference between competitive and attractive is, simply you want exports to shine so you make rupee cheaper which is competitive, and less attractive i.e. you let rupee devalue using SBP’s mechanisms. Why? It is simply because of the traditional IMF loan/tranche works on a short term 1-3 years loans spread over quarterly installments. So in short, the Fund wants exports to grow, at the expense of other economic variables. These exports bring revenues and pay for the Fund’s installments. The Fund has been a regular saviour or option of last resort since late 1980s and so when the government opted for the Fund they exactly knew what was in store for us.
Did our SBP ‘manage’ the rupee free fall? Not entirely true! According to currency market sources, the rupee’s slide was driven by three key reasons apart from many others:
1) Speculative trading coupled with panic in public. There were lots of rumours that someone from the government was involved and that led to the dollar buying spree. Not to miss the rumour that an international speculator Geroge Soros met the top government functionaries. There was a rush towards gold buying as well. Gold as per rumours was being smuggled to India via Pakistan. So some of us were buying large chunk of gold only to allow it to be smuggled to India where gold import has been taxed to save their currency from being devalued. Whether these rumours were true or not, what is important that rupee made an irrecoverable drop against the dollar and lost its value.
2) Flight of capital of nearly $25 million plus, at times $60 million a day from Pakistan. According to some members of the business community, some favourites within the community were tipped off well before, while others see the writing on the wall, ‘Take out your capital now!’. According to the SBP sources, the flight ran into staggering $9 billion a year. Some business community members were tipped off or whether the rumours that FBR has been handed list of the dollar accounts along with instruction to start sending legal notices, helped pave way for the capital flight or not, the bottom line is that flight of capital led to rupee depreciation.
3) Purely economical reasons – the SBP’S role. The condition of our own economy is not good either. The SBP also allowed the rupee devaluation unchecked. Needless to dwell too much into the technicals like staggering inflation, interest rate drop, government apathy towards main economic problems, political crisis, swollen current account deficits, load shedding, law and order, and the list can go on. As a natural consequence rupee was shedding its shine and the depreciation was inevitable. That the SBP through its mechanism allowed depreciation unchecked till it was too late, is an open secret.
What’s next?
All this is in the near past, and it is raising the most important question: what is going to come next? The US debt ceiling is not going away and that has brought it to a political standstill. The IMF and the World Bank will have its annual meeting to discuss just the above. Some of the IMF’s own findings are as addressed in Point 1:
Point 1) According to the IMF’s a day old report, Europe’s recession end is being debated with both Britain and the euro zone barely registering any positive this year. China, the world’s second-biggest economy, is encountering headwinds as infrastructure spending is down and a housing boom has ended. Japan alone seems to be rebounding but just announced tax increases that could curtail the fragile recovery. India’s rupee is undergoing no different fate than ours with economic leaders worried about swelling current account and budget deficits.
So if you devalue your currency to favour exports, you must assume that your trading partner’s economy is booming. If you are assuming that devaluation will help your exports, you must realize that exports are dependent upon demand and cost competitiveness. Both assumptions may fall short. Some feel that instead of opting for devaluation, is it a good time to check current account deficit, Tax to GDP ratio, budget deficit, government expenditure, encourage Public Private Partnership models and so on. No point to take steps which encourages indigenous capital outflow from the country or perhaps is this what the politicians want?
Point 2) If US debt ceiling which we are monitoring very closely, is resolved, that means, the US currency will rise against other currencies. The US dollar is standing at its lowest against euor, yen, pound sterling and forecasts suggest it will ascend in a matter of time only. Means the dollar will appreciate against rupee much faster than what we have seen before. That means the rupee will shed far more and much faster.
We have tried to accumulate opinions and suggestions of different investment advisors and economists say about the economy and summed it down as:
| *Forecasted Dollar Target 1-3 Months | Rs 108-112 / 1$ |
| *^Forecasted Dollar Target 3-6 months | Rs 112-116 / 1 $ |
| *Forecasted Current Account Deficit | Increase over last year
June- April 2013-14 $1.6-1.8 |
| *Forecasted Agricultural Output | Will increase over last year but consumers will see increased prices. |
| *Forecasted Industrial Output | Will increase over last year but consumers will see increased prices. |
| *Forecasted Foreign Reserve Levels | $ 10 bn to $4.5 bn. Will fluctuate for the next 6 month. This again will put pressure on the currency |
| *Forecasted Fiscal Deficit | 4.6% – 5.3%
An increase over last year.
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*Forecasted figures are only as a reference point for discussion which are subject to change. We do not claim responsibility of any decision based on the above.
^ If we were to take the differential and real inflation plus other factors such as discussed above in point two the dollar rupee parity should come close to Rs108-112 / 1$.
The above figures and numbers look ‘undamaging’ on the paper but on the ground it has far reaching impact on the economy and for the masses. The idea behind the entire discussion was to predict the rupee based on some logic and, some distant fears. How it comes out is a question mark, but as in history of ship wrecks, you do not blame the rock for taking you under or do you?