Rupee depreciation to render devastating effect on growth

KARACHI: Businessmen are worried over a massive depreciation of rupee in the last few days, saying this will have a devastating effect on the ‘already beleaguered’ economy.

“The depreciation will increase prices of all the essential items and will result into high inflation,” Zubair Tufail, president of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) said on Saturday.

The rupee depreciated around five percent against the US dollar in interbank foreign exchange market between December 7 and 15.

“We do not support depreciation of local currency,” Tufail added. “Further depreciation will hurt all the sectors of economy, including exports.”

FPCCI president advised the State Bank of Pakistan (SBP) to intervene and check the currency depreciation. The government is also advised to reduce cost of energy instead of allowing flexibility in exchange rate to incentivise industry.

Industry officials strongly reacted to a statement of the International Monetary Fund (IMF) regarding currency devaluation and urged the government not to follow dictations of the international lender.

IMF, in a statement, said the recent move by the State Bank of Pakistan (SBP) to allow adjustment of the exchange rate is “welcome, and continued exchange rate flexibility will be important in the period ahead”.

Muffasir Atta Malik, president of Karachi Chamber of Commerce and Industry (KCCI) said currency devaluation for a country like Pakistan will have negative economic implications in the long run.

At present, the importers have adjusted import prices while exporters are happy to have additional gains, Malik said. “But, imports will become costlier for new foreign purchases and exporters will also bear the brunt due to rise in cost of imported raw materials.”

KCCI president said prices of imported food products, including dairy, skimmed milk and powdered milk for consumers will shoot up.

Petroleum products have major share in import bill of the country. As oil prices in the international market are increasing, import cost will also escalate.

“Even if the petroleum prices remain stagnant at the current level retail prices of petroleum products will increase causing hike in prices of all the products, including fuel-based electricity generation,” Malik added.

KCCI chief said the government has already imposed regulatory duty and 100 percent cash margins to discourage some imports.

Economists said external debt burden will increase as a result of rupee depreciation and subsequently tax burden will increase.

“An estimated Rs500 billion will be added to the external debt burden,” Ayub Mehar, ex-research head at FPCCI said. “In order to generate this amount, the government will have no other option but to impose more taxes.”

Mehar said rupee depreciation for exporters would be a short-term jubilation because imports of raw materials including machinery will become more costly in near future.