Declining rupee to raise foreign debt burden, fuel inflation

[Naveed Yaseen]

Economists see no positive impact on exports as most of the export-oriented industries are closed

Sunday, August 02, 2009
By Mansoor Ahmad

LAHORE: The declining rupee is likely to fuel inflation besides adding to the foreign debt burden of the country without any chance of significantly impacting on its exports because most of the exporting industries are closed.

Pakistan added Rs127 billion to its $52 billion foreign debt in rupee terms in the first month of this fiscal as the rupee declined by Rs2.46 against the dollar from Rs80.71 on July 1, 2009 to Rs83.50 on August 1, 2009. This is a sharp decline of over 3 per cent in one month. The currencies in the other two South Asian countries remained stable during this period. The Indian rupee was valued Rs47.7 on July 1, 2009 and its value on August 1, 2009 was Rs47.8. The Bangladeshi Taka remained unchanged at Rs68.8 to a dollar.

What worries the economists is that the declining local currency has failed to spur exports. They point out that the plea of some economic managers that the exports decline would have been more sharper had the rupee remained stable is true but reveals the dire state of the Pakistani economy.

They say that the export decline in Pakistan has been sharper than in India that made inroads in the global markets in items to compensate the decline in its traditional exports.

Economists said the there was a huge surge in the exports of pharmaceuticals, auto-parts and high value added textiles to compensate for decline in traditional textile exports and in software. Bangladesh they pointed out in fact increased its exports despite global recession. The most ironical thing in this regard is that the Bangladeshi taka was valued lower than Pakistani rupee 15 months back, however today its value is almost 18 per cent higher than Pak rupee.

They said that the fact that Bangladesh increased its exports during the global recession with a stable currency while Pakistan lost its share in global markets despite depreciation of rupee should be an eye opener for our planners. The economists said that the rupee was valued Rs68.65 on July 1, 2008 and Rs80.71 a year later. The revenues they added too declined during the twelve months period of high devaluation.

Economists said that the efforts to tame inflation are also defeated by weakening rupee. They said that over 3 per cent decline in rupee value in one month would trigger inflation and much higher inflationary pressures would absorb the minute impact of some decline in petroleum rates.

They pointed out that Pakistan imports are almost two times the value of its exports. The prices of imported items including edible oil, powdered mill, pluses, petrol, industrial raw materials, auto parts, chemicals would register 5-6 per cent increase because the impact of devaluation is compounded at the import stage by the import duties and other government levies.

Economists said the amount of foreign debt servicing would increase and the cost of all development projects based on use of imported components will also rise. They termed the current wave of rupee depreciation to the lack of government control on foreign exchange transactions.

They said the pressure on rupee would ease if the government strictly controls the menace of under-invoicing and smuggling. Economists added this would require political will to confront the influential segments of the society that any government in Pakistan lacks.

http://www.thenews.com.pk/daily_detail.asp?id=191001