Aamer Shazad,Ejaz Shabbir
(University of Sargodha,Gujranwala Campus)
Now a days, everyone is gossiping about the depreciation of Pak rupee against
the US dollar. The media tycoons have accused the government for mismanagement
of macro economics vehicles like; monitory policy, political situation, balance
of payments, interest rates, market judgment, and most importantly Speculations.
When the PML-N government took charge in June 2013, dollar was at the level of
PKR 100 and then it reached at PKR 108.50. The foreign exchange reserves stood
at around $11.69 billion till April 18, 2013, every week the country has to
spend around $500 million under the head of import bills. Also due to repayment
of loan, reserves would face pressure. Let’s start with short history and try to
conclude the actual reasons behind this decline of Pak rupee and how rupee will
beat dollar?
In November, 2008 Pakistan secured a 23 month Stand By Agreement (SBA) worth of
Special Drawing Rights SDR 5.1685 Billion and this was augmented to an amount
equivalent to SDR 7.2359 Billion in August 2009. To ensure the success of the
loan program, the IMF, in consultation with the government, designed performance
criteria and structural benchmarks. The government, however, failed to implement
some of the important conditions. Consequently, following the completion of the
fourth review in May 2010, IMF suspended the program. Disbursements under the
arrangement had reached SDR 4.936 Billion till then. The remaining two tranches
worth SDR 2.296 Billion were withheld. At later stage, the IMF extended the
program in December 2010 till September 2011 “to complete the reform of the
General Sales Tax, implement measures to correct the course of fiscal policy,
and amend the legislative framework for the financial sector”. The criteria were
not met till then and the program was suspended.
The fiscal discipline ended up with an 8.8% deficit in the last fiscal year
2012-13. The rupee depreciated from an average of PKR 85.5 to USD 1 in FY
2010-11 to an average of PKR 89.2 to USD 1 in FY 2011-12. This continuous fall
in currency has been a deterrent not only for the foreign investors but also for
the local investors. As a result, most local investors preferred to hold their
savings in foreign currency instead of making local investments. Pakistan’s
credit rating also suffered as Moody’s Investors Service cut the country’s
international credit rating from B3 to Caa1 in 2012. CMA (now S&P Capital IQ),
released its Global Sovereign Credit Risk Report in 2011 which ranked Pakistan
5th in a global “Cumulative Probability of Default” rank in Q2 of 2011 and 3rd
in Q1 of 2012. Heavy debt repayments to the IMF have been putting a dent in the
central bank’s reserves, which have declined by nearly 20% in the current fiscal
year, putting pressure on the rupee.
Accordingly, the government has made a request for a loan to the IMF. “Pakistan
has to avoid committing default on foreign loans,” said Mr. Ishaq Dar, Finance
Minister of Pakistan. “That’s the only reason we are going to IMF with a
homegrown reform program.” The IMF has agreed to lend Pakistan an amount of USD
5.3 Billion (originally asked for USD 7.2 Billion) under the Extended Fund
Facility (EFF) over the next three years to boost Pakistan’s FX reserves and to
help the economy. The 3 year loan will be available with a 3 percent floating
interest rate. The IMF was not yet ready to give the loan in advance as
Islamabad wants to use the same amount to return the previous IMF loan to ease
pressure on the reserves and that’s the reason to take up loan in September
2013.
It is natural that IMF’s EFF program will come with its conditions, but from a
rational point of view, Pakistan does not have any other option to turn to. The
government will have to reduce subsidies, especially to the power sector. Then
the axe would fall on the development expenditure. The real test for the
government would be to expand the tax base by bringing agriculture, services and
evaders into the tax net. Otherwise, the salaried class and the existing tax
payers will continue to suffer. With little room to maneuver the budget, real
economic success will depend on the attractiveness of our business environment
in the eyes of both foreign and local investors.
A Statement given by the Federal Minister Finance Ishaq Dar that Government will
bring rupee-dollar parity back to Rs. 98 to a dollar from Rs. 110/dollar. He
also stated said that US dollar price would be brought down urging the investors
to encash their dollars to avoid losses. Rupee beat dollar as trend reversed
after Dar’s Statement. Malik Bostan, Chairman foreign exchange association said
that banks have sold around $100 million to the exchange companies in the last
couple of days. The reasons behind the statement of the Finance indicate
Minister that there are several inflows which positively affect the country
foreign exchange reserves.
Foreign exchange will improve from now onwards due to Short term BOP support
borrowings $225 million / $ 100 million received, Islamic Development Bank
support Euros 750 million / Euro 200 million received, IFC trade financing
facility ($ 500 million); Global rupee bond, Euro Bond $ 500 million (FA
appointment shortly), Remittance-based Bond (FA appointment will follow Euro
Bond launch), Fast-track of capital-market-based disinvestment of government
shares, $ 1.6 billion World Bank and ADB policy loans, $ 850 million CSF, $ 800
million Etisalat, $ 1.2 billion spectrum auction. And also Pakistan qualifies
for second installment from IMF about $500 million after the improvement in
Fiscal position at November 2013.
The situation of inflows will further improve and those who speculate on
Pakistani currency would end up as losers. The government, encouraged by
positive outlook projected by “Standard and Poor” ‘Moody’s’, planned to float a
global rupee bond with the assistance of IFC who is also interested in floating
of sovereign bonds of Pakistan which has received a very positive response from
the market.
At present, Pakistan is in a similar situation as Turkey was in 2001 (Turkey’s
situation was actually even worse). It also had to resort to the IMF to get out
of the crisis. However, Turkey’s prudent policies and determination have
transformed the country into a stable, dynamic and well-functioning economy. In
May 2013, Turkey completely paid off its debt to the IMF. Can Pakistan follow
suit? The answer is yes. Non-availability of dollar currency notes and
speculative activities in the market were reasons behind dollar volatility but
now the situation is different and we hope that Pak rupee will beat dollar.