Currency depreciation to increase external debt by $2.5b

Islamabad

The US dollar has gained strength against all major currencies of the world and Pakistani rupee has also witnessed gradual depreciation of over three rupees in recent weeks, crossing Rs 108 against dollar, which is bound to hike the public debt and liabilities in months ahead.

Top official sources confirmed to The News on Friday that owing to strength gained by US dollar against other major currencies of the world including Yen, Pounds, Euro and others, it would have far reaching negative impact for Pakistan’s economy as the country’s external debt is bound to increase by around $2 to $2.5 billion till end December 2016 with the recent adjustments even without gaining loan amounts by the country.

Earlier, Pakistan had reap positive impact because of downward adjustment of US dollar against other currencies of the world in last three years but now this trend had reversed that would be causing losses to Pakistan on account of increased burden on external debt.

The most worrying factor for Pakistan is reversal of positive impact of adjustment in world currencies into negative as earlier the dollar had lost grounds against Yen and other currencies that provided around $4 billion benefit to Islamabad on the account of external debt but now the strength of dollar would cause loss to the country hiking the external debt by at least $2 billion in this ongoing financial year.

Although, the government’s top guns claim that smuggling of currency and gold was the major reason behind recent depreciation of rupee against dollar but there were other important factors responsible for recent downslide of exchange rate in case of Pakistan.

“The one rupee depreciation against US dollar will hike the burden of public debt by Rs72 billion as the total external debt stands at $72 billion so three rupees depreciation will cause increase in debt burden by just Rs216 billion and the interest payments will be bound to hike in months ahead.

The international financial institutions (IFIs) high-ups argued that the real effective exchange rate (REER) was overvalued in Pakistan and the IMF had assessed that the rupee should be standing at Rs118 against US dollar. They argued that the Musharraf/Aziz regime had artificially managed the exchange rate at Rs62 against US dollar from 2005 to 2008 but all of sudden the pressure reached to boiling point owing to deteriorating other economic indicators and the currency nosedived in 2008 and finally it stabilised after signing loan agreement with the IMF.

Now after saying goodbye to the IMF, there is need to analyse the economic situation carefully as the current account deficit (CAD) has already crossed $1.5 billion in first four months and it is projected to cross $5 billion during the current fiscal year.

At a time when all neighboring countries such as India, China and Bangladesh are allowing downslide in the currencies, it becomes hard for exporters to ensure their shares in exports because their incentives decreased against their competitors.

The All Pakistan Textile Mills Association (APTMA) and other exporters are also lobbying to convince the government for gradual adjustment of rupee as the central bank was showing reluctance to intervene into open market despite this fact that the country possessed comfortable position on account of piled up foreign exchange reserves (FER) which stood at the highest level in the country’s history at the moment.

In order to give impetus to boost exports of the country’s made-ups, the gradual and slight adjustment in currency is important but the government along with the central bank will have to take informed decision backed by empirical evidence to determine its exact level where economic interests of the country were fully protected.