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Declining rupee value may affect GDP growth rate

Published on 26th Aug, Edition 35, 2013

 

The next Monetary Policy is to be announced by the State Bank of Pakistan on September 13, 2013 which is likely to decide the future course of policy rate in the days to come, keeping in view the rate of inflation as the tightening or softening of the monetary policy is usually linked with the ups and down of the inflation rate. If this theory is taken into consideration it would be difficult for the financial regulators to keep the policy rate unchanged as the constant hike in power tariff and petroleum products is bound add to inflation pressures.

Besides that the government is about to enter into loan arrangement with IMF which generally advises financial regulators in Pakistan to go for tightening of the energy policy and this time it is one of the conditions of the IMF to keep the interest rate on the higher side, so there is a possibility that the policy rate may enter once again into double digit regime probably in the third or fourth quarter of the current fiscal year 2013-14.

The fall of rupee against US dollar hitting crossing the psychological barrier of 100 mark is yet another noticeable factor on the financial landscape of Pakistan as well as devaluation of Indian and Bangladeshi currencies would also play a role in determining the policy rate.

The fall of rupee against dollar might be pleasing to the exporters and the overseas Pakistanis who have become a major source of external flows as they might be getting better returns on their remittances or export earnings but rest of the economic segments are feared to be serious affected due to declining rupee value which need an effective intervention from the financial regulators to stabilize the currency, as the steep decline in rupee value would aggravate the repayment of huge foreign loans and their debt services is a serious thing to ponder upon by the people at the helm of affairs.

Since the economy is Pakistan is heavily dependent on imports especially the petroleum products which come to around $15 billion a year besides other imports bringing the total to over $30 billion dollar per annum which would certainly have a multiplier effect on general prices in Pakistan. This situation calls for immediate steps for arrest of declining rupee against dollar which is feared to affect the investment in the capital market as well. The fall of rupee against dollar however is not alone affected the Pakistan currency but also to other currencies in the region.

One of the major challenge posing the declining value of rupee may be related to our weak GDP growth rate and if the steps to arrest the declining trend of rupee again dollar were not taken on time, it may becoming an uphill task for the private sector to achieve the GDP growth rate target set at over 4 percent for the current fiscal year.

It would be the declining rupee value which may add to output cost of the manufacturing, export and agriculture inputs which are the major players in contributing to GDP growth of the country.

The new phenomenon of drastic decline of regional currencies against dollar which brought the Indian rupee to the life time low against dollar is, however, bridging the yawning gap between the regional currencies especially of Pakistan, India and Bangladesh.

 

It was hardly a couple of months ago when Indian rupee was at 41 against dollar while Pak rupee was around 96-97 a dollar but the economic slowdown which has hit China, India and Pakistan bringing the Indian rupee at life time low at 64 which is approaching fast to 70 a dollar with next few weeks, said financial experts. The Bangladesh takka was also not an exception to the race of currency depreciation which stood at Rs77.40 against dollar.

The expensive dollar has an adverse impact on import based economies while the capital intensive exports are not usually reexported from Pakistan as compared to neighboring India. The glaring example of costly imports in Pakistan is the automobile sector which heavily relies on import of completely built units (cbu) or even other wise on imports of principal spare parts for locally assembled cars or vehicles while automobile industry does not exports locally produced cars like India where a large number of vehicles are mandatory to be exported. The most crucial segment of import regime in Pakistan is the fuel oil for power generation as more than 75 percent of the total electricity produced in the country is produced from the costly imported fuel oil.

In view of the constant appreciation of dollar the theory of promotion regional trade in local currencies is a way out to give a relief to the economy.

Pakistan has already entered into currency swap arrangement with China and Turkey which needed to be expanded to the neighboring countries like India for trade in local currency. It may be noted that India has also entered in a short of currency swap with Iran and paying in local currency for its crude imports to India.

The Indian rupee could touch 70 against the US dollar in a month or so, although some revival is expected in the currency by the end of the year, Deutsche Bank said in a report.

“We continue to believe that fundamentally the rupee is undervalued and has overshot its equilibrium level substantially, but as numerous episodes of past currency crises have amply demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time, economists at the bank wrote in the report.

Meanwhile the UK pound for the first time breached the 100 mark – against Indian rupee making it the first currency to hit a century maintaining its edge over the greenback.

According to reports the appreciation in the British currency affects traveling to the European countries particularly students and tourists. The sharp rise in the cost of living in UK has already impacted plans of students who are now looking at other countries.

Germany, France and Australia are showing an increase in the number of students. Travel from India could also get hit following a decision by UK to go ahead with requiring “high risk” Indian travelers to provide a GBP3000 Visa bond.

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