THE inevitable has happened. The rupee has been allowed, though belatedly, to shed some extra weight.
The
exchange rate uncertainty — which engulfed markets in July after the
then finance minister, Ishaq Dar, audaciously reversed the central
bank’s move to depreciate the local currency — ended on Dec 8. On that
day, the State Bank of Pakistan (SBP) once again withdrew rupee support
through a market mechanism, leading to a fall of 4.3 per cent in the
currency’s value against the dollar in the next six days.
Bankers
and analysts have long been saying that the depreciation of the rupee
was not a question of ‘why’, but ‘when’ and ‘how’. So here it is — a new
rate band of Rs110-110.50 per dollar that the SBP may now defend until
the full impact of the readjusted exchange rate becomes clear, top
bankers say.
In fact, the central bank did intervene in
the market twice last week, warded some undue pressure off the rupee and
helped it close at Rs110.09 at the end of the day on Dec 14. “Had two
large local banks not pumped in greenbacks in the market (which forex
dealers suspected was done on SBP’s advice), the rupee would have closed
at around Rs111 a dollar,” treasurers of a local bank told this writer.
But
another bank treasurer said the pressure on the rupee seen on Dec 13
and Dec 14 was also in response to a rise in the dollar’s value across
Asia after a decision by the US Fed to increase its policy rate for the
third time in 2017.
Regardless of whether the SBP defends
a new rate band or leaves it completely in the hands of market forces,
the rupee may continue to remain under pressure for some time because of
soaring trade and current-account deficits.
Pakistan’s
trade deficit shot up to $15 billion (with exports at $9bn and imports
at $24bn) in the first five months of this fiscal year, according to the
Pakistan Bureau of Statistics. And according to the SBP, the current
account deficit in the first four months of this fiscal year totalled
$5bn, more than double the $2.26bn figure in the year-ago period.
Regardless of whether the SBP defends a new rate band or leaves it to market forces, the rupee may continue to remain under pressure for some time because of soaring trade and current-account deficits
A weakening rupee may provide some support to exports, which
have already started growing this fiscal year. But fixing the trade
deficit will remain elusive unless imports slow down.
The
rupee depreciation can make a dent in import growth in the areas of
non-machinery, non-oil groups of food, luxuries and automobile, where
the imposition of regulatory duties in August is also expected to make
an impact.
But the sixty-four thousand dollar question
is: how well will the rupee depreciation support export growth?
Emboldened by an incentive package, less-interrupted supply of energy
and growth in the large-scale manufacturing, our main export — textiles —
is already growing.
And while a weaker rupee can
increase the pace of growth of overall exports, exporters are also
trying to improve their own manufacturing and marketing capabilities to
become more competitive in the world market.
“The rupee
depreciation is sure to boost the cost of external debt financing. But
the prospects of a 6pc economic growth in the current fiscal year and
the ongoing fiscal belt-tightening and plugging in revenue losses can
offset its impact,” says a senior official of the Ministry of Finance.
Central
bankers say they would keep watching the impact of the rupee decline on
inflation, but hope it would not to be too problematic because domestic
supplies of both food and non-food items are sufficient at the moment.
They
privately admit that imports of industrial raw materials would become
more expensive after the exchange rate adjustment. How the new rates
will affect essential imports and how industries using those raw
materials will respond to it should be watched closely.
While
most local bankers and analysts are apparently satisfied with the new
exchange rate, some of them insist the rupee is still overvalued.
Describing
the recent rupee depreciation a welcome move, London-based Pakistani
economist Raza A. Agha said in an emailed comment that “more needs to be
done”, considering the still prevailing weakness of the external
sector.
“The real effective exchange rate model suggests
the rupee was 14.5pc overvalued in end-November, implying a rate of
Rs121 per dollar. (But) whether the rupee will … get to Rs121 is another
question,” said Mr Agha, who works as the chief economist for the
Middle East and Africa at VTB Capital.
He and other
analysts believe that after the rupee’s decline, there is a need to
raise domestic fuel and power tariffs, “otherwise there will be a fiscal
impact.”
SBP officials point out that in addition to
maintaining the interest and exchange rates at adequate levels, their
mandate also includes promoting economic growth.
“That is
why you see we don’t always buy pure technical arguments for rupee
depreciation beyond a certain level, even when the pressure comes from
the IMF,” one official told this writer, implying that the IMF, too, had
called for more depreciation of the rupee value than allowed by the
central bank.
