Economy to bear the brunt of erratic currency fluctuations

LAHORE: The erratic fluctuation in the value of rupee not only hints at a lack of planning on part of the central bank but also lays bare the blind submission of country’s economic managers to the diktats of International Monetary Fund’s (IMF).

Prudent devaluation does not create uncertainties, being witnessed currently, that would tempt exporters to withhold export proceeds. The fact is that the government in its talks with the IMF had agreed to devalue the rupee. Globally the two best options for devaluation are to announce the expected rate at which the central bank wants the currency to trade against dollar or the devaluation is done in a systematic way reducing the value of currency by 0.5 percent per weak or fortnight.

The gradual devaluation allows the importers and exporters to adjust to the small declines. The pressure on rates is gradual. The exporters that usually pass on the benefit of devalued rupee under the pressure from foreign buyers and the country earns optimum foreign exchange. In case of devaluation in one go, the exporters have to share the gains with their buyers. This is evident from the fact that none of the past high devaluations resulted in any significant increase in exports. However this option is still better than the uncertainty that has been created now.

Soon after the announcement of an agreement with the IMF the rupee shed Rs8 against the dollar and then recovered late in the day to end up with a decline of Rs3 because the central bank intervened to stop the slide. The rupee then again declined to Rs112 on Tuesday. This has not only created uncertainty but also proved the central bank’s intervention failed to work. This will mount pressure on rupee further as the importers would rush to open letter of credit and hedge dollar at current rate.

The exporters on the other hand would make efforts to delay the remittance of export proceeds because they would expect further devaluation. These two divergent efforts would create dollar shortage and weaken the rupee more. It is high time State Bank of Pakistan (SBP) should come out loud above the level at which it wants the rupee to be traded. Letting the rupee find its own value in the open market is absurd because it gives rise to speculation and the central bank has to intervene.

The rupee would remain under pressure till the ever increasing gap between the imports and exports is narrowed. There would be no decline in imports if the policies on luxury and non-essential items are based on protecting the interests of the rich. For instance, the country simply cannot afford imported luxury cars, bullet proof vehicles, fresh and processed foods, cosmetics, and so on.

Either the regulatory duties on nonessential imports should be painful or there should be a total ban on these items. Only then the import bill will come down. To increase exports the government would have to look beyond textiles.

By the way the devaluation has eliminated the gap that the textile millers have been talking about because of higher per unit power rate of Rs3.5. The rupee has declined by Rs5 so it would also cover their other inefficiencies. It is strange that textile trade bodies are silent on this export boosting devaluation but are complaining about the blackout of gas supply from December to March, a regular feature for the last five years.

For the first time in the last four years the devaluation would test the patience of common consumers. In a country where imports are more than two times the exports, the devaluation would increase the rates of almost all items. Crude oil price has jumped to $65 from $ 60 a barrel. At $60 its cost in rupee term a week back was 105x60=Rs6300. At the same rate the price would have gone up to 110x60=Rs6600. But at a rate of Rs110 to a dollar the cost would go up to 110x65=7150. So when the fuel prices are adjusted at the end of this month we will face an additional burden of Rs5150 per barrel on account of rupee devaluation in addition to the impact of higher global oil prices.

Our foreign debt at $72 billion until last week was equivalent to 72x105=Rs7560 and now it would be 72x110=7920. In other words debt burden for the same amount of dollars would increase by Rs360 billion. This is almost 10 percent of our tax collection and 9 percent of our annual budget.