Exchange rates on swing

At the same time, while the government claims a return to good business growth, many economists and financial analysts question it.

The dollar, after a continuously long time, depreciated on March 12 to Rs97.20/97.40, turning Finance Minister Ishaq Dar’s dreams to bring it down to around Rs98, into a reality. Its key cause was a $1.5 billion Saudi gift to bolster Pakistani external accounts.

Pakistani rupees and US dollars at a currency exchange in Islamabad. The rupee appreciated after the disclosure that Saudi Arabia has provided a “gift” or grant of $1.5 billion to help Pakistan, as it faces a depletion of its forex reserves. — AFP

Dollar was trading at Rs98 in the inter-bank market, and Rs100.25/100.50 in the open market over the weekend.

An expected inflow of $550 million from IMF later this month, and $1.5 billion Saudi Arabian assistance in April are the reason for “an upbeat sentiment about the external current account, and the rupee-dollar parity should remain intact,” market sources say.

Add to that the State Bank of Pakistan, or SBP, the central bank, with its new monetary policy, retains the benchmark discount rate at 10 per cent. Its reason: the country is facing some very serious challenges, including a return to higher inflation. The government had wished to bring down the dollar rate from Rs109 to 98, although it had even traded in the range of Rs110-113 in the previous few days. But shortly after a decline, the dollar resumed rising, once gain, due to activities of the speculators and a short supply in the market. Money changers also blamed the central bank for buying large amount of dollars to boost its own forex reserves.

The rupee appreciated after the disclosure that Saudi Arabia has provided a “gift” or grant of $1.5 billion to help Pakistan, as it faces a depletion of its forex reserves. Saudi Arabia had also, reportedly, provided Islamabad with a $ 5.5 billion help in 1998, when Pakistan faced US and Western sanctions on the back of its nuclear tests.

These are the two key questions that hit the Pakistanis at home and abroad, as well as foreign investors and the multi-national financial institutions. Masses, who fondly voted Prime Minister Nawaz Sharif in May, are wondering who is minding the store? The reason: no respite is on the horizon from rapidly rising consumer prices and a general chaos in governance.

On the other hand, the rising rupee may not have made millions of Overseas Pakistanis, working in the UAE, Saudi Arabia, US and UK, happy over the dollar’s decline, because it meant, their families at home will be getting fewer rupees in exchange for a dollar. It has, and will continue to, impact them because in case they bring back a car or other valuable equipment, to sell it in the home market, they will, now, get fewer rupees than before.

But for Pakistanis at home, the hope that the ongoing price spiral — especially for food and other consumer items ranging from medicines to electricity and natural gas for cooking — will comedown, has been denied so for. In fact, the government, rather than cutting the very high electricity tariff, raised it further by Rs2.40 a unit, the historic day after the dollar went down. No respite in other prices, too.

In fact, Dr Hafiz Pasha, the former Finance Minister, and an economist of repute, says: “The rupee appreciation will have a salutary effect in reducing inflation.”

“We expect the inflation to go down by 1.5 to two percentage points. Consequently, the rate of inflation could fall to seven per cent. The power tariff should be down eight per cent, and diesel and petrol prices be cut by Rs7 a litre. We expect hope, this will be announced shortly,” Pasha said.

It should be a seven per cent reduction in imported items, across the board. Other prices of imported goods, but more importantly, the prices of imported cooking oil, baby food, medicines and medical supplies, and a wide range of industrial inputs should come down. But nothing happened on the ground.

But, the exporters are an unhappy lot. They say, ”We fear that at a time when most of our competitors have allowed their currency to lose value, the negative effect of a strengthened rupee on exports will be particularly high.”

In fact the business organisations, across the country are demanding compensation and monetary benefits — ranging from seven to 10 per cent — on most exports, particularly textiles, which brings home 55 to 60 per cent of all export earnings.

The other key event of these days was that SBP monetary policy continued the benchmark discount rate at 10 per cent. The business and financial analysts were expecting a 50 to 100 basis point reduction in view of the government’s claims of a falling inflation rate and a rising GDP growth, to which was added the latest appreciation of the rupee against the greenback. While announcing the new MP, SBP acknowledged “the positive developments in the economic indicators.”

But, for the future it saw “several challenges for the economy.” It also urged the government “to make proactive policy efforts and concerted structural reforms to continue to maintain the growth momentum.”

SBP has asked the government to take steps to improve efficiency and competitiveness of Pakistani exports and to reduce the share of imported oil in meeting the domestic energy needs.

“The appreciation in the exchange rate has improved the inflation outlook with a higher likelihood of the average inflation to remain within dingle digit for fiscal year 2014.”

The year-on-year Consumer Price Index, or CPI has come down to 7.9 per cent.

It also says, all major economic indicators have moved in “the desired direction over the last few months” after Prime Minister Sharif took over. “Inflation has come down and growth in large-scale manufacturing at 6.8 per cent, has been strong.” It indicates improved aggregate supply and larger bank credit for the private sector by the commercial banks.

Zakria Usman, president of Federation o Pakistan Chamber of Commerce & Industry (FPCCI) demanded that the SBP should have cut the DR to facilitate business growth and larger industrial output. He also called for a reduction in fuel prices by at least 10 per cent that will have “an immediate impact on prices.”

Abdullah Zaki, president of Karachi Chamber of Commerce & Industry (KCCI) said: “The business community rejects the monetary policy decision. We are expecting a reduction of at least100 basis points in the discount rate.”

“A timely cut in the DR will benefit the manufacturing activities in the country,” he said. These are the two important financial events. Where will the dollar-rupee parity settle down for even a medium-term period, and how will it effect the domestic economy and the Overseas Pakistanis, should be indicated in the next weeks.

Views expressed here are his own and do not reflect newspaper’s policy.