Devaluation of Pakistan Rupee

DEVALUATION OF DEVALUATION OF PKRPKR

IN THE FIRST 6 IN THE FIRST 6 MONTHS OF 2008MONTHS OF 2008

presented bypresented by

Abdul Hameed BalochAbdul Hameed Baloch BM-25011BM-25011  

CURRENCYCURRENCY

Unit of exchange, facilitating the transfer Unit of exchange, facilitating the transfer of goods and/or services.of goods and/or services.

It is one form of money, where money is It is one form of money, where money is anything that serves as a medium of anything that serves as a medium of exchange, a store of value, and a standard exchange, a store of value, and a standard of value.of value.

Currencies are the dominant medium of Currencies are the dominant medium of exchange.exchange.

DEVALUATIONDEVALUATION Reduction in the value of the currency Reduction in the value of the currency

with respect to other monetary units.with respect to other monetary units.

Official lowering of the value of a Official lowering of the value of a country’s currency within a fixed country’s currency within a fixed exchange rate system to set a new exchange rate system to set a new fixed fixed rate rate with respect to a foreign reference with respect to a foreign reference country.country.

Depreciation:Depreciation: Unofficial decrease in the Unofficial decrease in the exchange rate in a floating exchange rate exchange rate in a floating exchange rate system.system.

FIXED EXCHANGE RATE FIXED EXCHANGE RATE SYSTEMSYSTEM

Currency’s value is matched to the value of Currency’s value is matched to the value of another single or basket of other currencies, or to another single or basket of other currencies, or to another measure of value, such as Gold.another measure of value, such as Gold.

Under a fixed exchange rate system, devaluation Under a fixed exchange rate system, devaluation and revaluation are official changes in the value and revaluation are official changes in the value of a country's currency relative to other of a country's currency relative to other currencies.currencies.

Both devaluation and revaluation can be Both devaluation and revaluation can be conducted by policymakers, usually motivated by conducted by policymakers, usually motivated by market pressures.market pressures.

The charter of the International Monetary Fund The charter of the International Monetary Fund (IMF) directs policymakers to avoid (IMF) directs policymakers to avoid "manipulating exchange rates...to gain an unfair "manipulating exchange rates...to gain an unfair competitive advantage over other members."competitive advantage over other members."

FLOATING EXCHANGE RATE FLOATING EXCHANGE RATE SYSTEMSYSTEM

Market forces generate changes in the value of Market forces generate changes in the value of the currency.the currency.

Flexible type of exchange rate regime where Flexible type of exchange rate regime where currency’s value is allowed to fluctuate currency’s value is allowed to fluctuate according to the forex market.according to the forex market.

They allow dampening of shocks and foreign They allow dampening of shocks and foreign business cycles.business cycles.

Managed float:Managed float: A central bank will intervene to A central bank will intervene to stabilize currency. For instance, it might allow a stabilize currency. For instance, it might allow a currency price to float freely between an upper currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". and lower bound, a price "ceiling" and "floor".

DEVALUATE: DEVALUATE: UNDER WHAT UNDER WHAT CIRCUMSTANCES?CIRCUMSTANCES?

Country devaluated because the interaction of market Country devaluated because the interaction of market forces and policy decisions has made the currency’s fixed forces and policy decisions has made the currency’s fixed exchange rate untenable.exchange rate untenable.

Inability to spend its foreign exchange reserves to Inability to spend its foreign exchange reserves to purchase all offers of it’s currency at the established rate.purchase all offers of it’s currency at the established rate.

Devalue to makeDevalue to make Exports cheaper for foreignersExports cheaper for foreigners Imports expensive for domestic consumersImports expensive for domestic consumers

This may help reduce Current Account Deficit.This may help reduce Current Account Deficit.

Policy issues: Instead of unpopular fiscal spending Policy issues: Instead of unpopular fiscal spending policies, use devaluation to boost aggregate demand in policies, use devaluation to boost aggregate demand in the economy.the economy.

EFFECTS OF EFFECTS OF DEVALUATIONDEVALUATION

Increasing price of imports and stimulating greater Increasing price of imports and stimulating greater demand for domestic products can lead to demand for domestic products can lead to inflation.inflation.

Psychological: Viewed as sign of economic Psychological: Viewed as sign of economic weakness.weakness.

Creditworthiness of a country may be jeopardized.Creditworthiness of a country may be jeopardized.

Successive rounds of devaluation. Trading Successive rounds of devaluation. Trading partners may become concerned that devaluation partners may become concerned that devaluation might negatively affect their own export industries.might negatively affect their own export industries.

EXCHANGE RATEEXCHANGE RATE The year 2008 has been termed disastrous for The year 2008 has been termed disastrous for

the rupee.the rupee.

So far it has lost 23% of it’s value since So far it has lost 23% of it’s value since December 2007.December 2007.

Record low of Rs 81.4 against US$ 1.Record low of Rs 81.4 against US$ 1.

In April 2008 Dollar was traded at Rs 64.In April 2008 Dollar was traded at Rs 64.

A few months back it was Rs 60.A few months back it was Rs 60.

Exchange rates: Pakistani Exchange rates: Pakistani rupee (PKR) per US$1rupee (PKR) per US$1

RATE RATE YEAR/DATEYEAR/DATE 84.0084.00 (16/10/08) (16/10/08) 71.50 71.50 (26/07/08) (26/07/08)

63.50 63.50 (01/04/08) (01/04/08) 60.5060.50 (01/11/07) (01/11/07) 60.75 60.75 (05/08/2007) (05/08/2007) 58 58 (2004) (2004)

57.752 57.752 (2003) (2003) 59.723859.7238 (2002) (2002) 61.927261.9272 (2001) (2001) 53.6482 53.6482 (2000) (2000) 51.90 51.90 (1999) (1999)

44.550 44.550 (1998) (1998) 40.18540.185 (1997) (1997)

35.266 35.266 (1996) (1996) 30.930 30.930 (1995) (1995)

FACTORS CAUSING FACTORS CAUSING DEVALUATIONDEVALUATION

Foreign Currency Reserves falling $800 to Foreign Currency Reserves falling $800 to $900 per month.$900 per month.

Law and Order situation.Law and Order situation. Flight out capital $70 million a day.Flight out capital $70 million a day. Gap between import and export bill.Gap between import and export bill. Downgraded credit rating by International Downgraded credit rating by International

Rating Agency Standard & Poors and Rating Agency Standard & Poors and Moody’s.Moody’s.

Inflation rate more than 25%.Inflation rate more than 25%. Widening Current Account Deficit.Widening Current Account Deficit. Heavy Government borrowing to cover Heavy Government borrowing to cover

budget deficit.budget deficit.

BALANCE OF PAYMENTBALANCE OF PAYMENT BoP measures the payments that flow BoP measures the payments that flow

between any individual country and all between any individual country and all other countries.other countries.

Determined by the country's exports and Determined by the country's exports and imports of goods, services, and financial imports of goods, services, and financial capital, as well as financial transfers.capital, as well as financial transfers.

ComprisesComprises Current AccountCurrent Account Capital AccountCapital Account Financial AccountFinancial Account

BoP and PKRBoP and PKR Pakistan has a huge trade deficit, and our exports are very Pakistan has a huge trade deficit, and our exports are very

low.low.

The dollars we get as a result of exports is small compared to The dollars we get as a result of exports is small compared to the dollars we have to pay for our imports.the dollars we have to pay for our imports.

We need dollars and cannot afford to let go of whatever little We need dollars and cannot afford to let go of whatever little we get in the form of our export bills.we get in the form of our export bills.

If the rupee appreciates in value against USD, that will If the rupee appreciates in value against USD, that will increase our export bill for the buyer, and if that happens, we increase our export bill for the buyer, and if that happens, we risk losing that client to a cheaper alternate, like China or risk losing that client to a cheaper alternate, like China or India.India.

In order to 'retain' our exports, the state bank manipulates In order to 'retain' our exports, the state bank manipulates the exchange rate for rupee, to ensure that it doesn’t the exchange rate for rupee, to ensure that it doesn’t appreciate by too much against the dollar.appreciate by too much against the dollar.

EXPORTSEXPORTS Some of the items of its exports are oil seed, cotton, rice, Some of the items of its exports are oil seed, cotton, rice,

wool, fish fresh, chilled frozen, tobacco etc.wool, fish fresh, chilled frozen, tobacco etc.

Main export items are rice and Cotton.Main export items are rice and Cotton.

Pakistan also faces severe competition in the world market Pakistan also faces severe competition in the world market like other developing countries.like other developing countries.

Even with good harvest after good climate Pakistani goods Even with good harvest after good climate Pakistani goods can fetch good prices can fetch good prices only only if harvesting in competing if harvesting in competing nations was bad due to unfavorable weather.nations was bad due to unfavorable weather.

Pakistan's exports stood at $17.011 billion in the financial Pakistan's exports stood at $17.011 billion in the financial year 2006-2007, up by 3.4 percent from last year's exports year 2006-2007, up by 3.4 percent from last year's exports of $16.451 billion. of $16.451 billion.

IMPORTIMPORT Main items of import are petroleum and Main items of import are petroleum and

petroleum products, vegetable oil and fats, team petroleum products, vegetable oil and fats, team wheat, milk and cream etc.wheat, milk and cream etc.

Import of petroleum and petroleum products is Import of petroleum and petroleum products is very vital for the survival of the economy and very vital for the survival of the economy and have been on the rise in the international have been on the rise in the international market.market.

Pakistan's imports stood at $30.54 billion in the Pakistan's imports stood at $30.54 billion in the financial year 2006-2007, up by 8.22 percent financial year 2006-2007, up by 8.22 percent from last year's imports of $28.58 billion.from last year's imports of $28.58 billion.

DEFICITDEFICIT Pakistan suffered a merchandise trade deficit of $13.528 Pakistan suffered a merchandise trade deficit of $13.528

billion for the financial year 2006-7.billion for the financial year 2006-7.

In 2002-3 the deficit was only $1.06 billion.In 2002-3 the deficit was only $1.06 billion.

The combined deficit in services and goods stand at The combined deficit in services and goods stand at $17.653 billion which is approx 83.5 percent of country's $17.653 billion which is approx 83.5 percent of country's total export of $21.136 (Goods and services).total export of $21.136 (Goods and services).

The rise in the trade gap has been attributed to high oil The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery import bill, and rise in the prices of food items, machinery and automobiles.and automobiles.

Current account deficitCurrent account deficit - Current account deficit for - Current account deficit for 2006-7 reached $7.016 billion up by 41 percent over 2006-7 reached $7.016 billion up by 41 percent over previous year's $4.490 billion.previous year's $4.490 billion.

FOREIGN RESERVESFOREIGN RESERVES As of October 11, Pakistan's foreign currency As of October 11, Pakistan's foreign currency

reserves totaled $7.75 billion, having fallen $570 reserves totaled $7.75 billion, having fallen $570 million in a week. million in a week.

Critically, the central bank's share of this has Critically, the central bank's share of this has fallen to $4.34 billion, while commercial banks fallen to $4.34 billion, while commercial banks held $3.41 billion.held $3.41 billion.

As a result of deteriorating external balances and As a result of deteriorating external balances and dwindling reserves the rupee fell almost 2.8 per dwindling reserves the rupee fell almost 2.8 per cent in a day to a record low of 84.40, having lost cent in a day to a record low of 84.40, having lost 27 per cent since the start of 2008.27 per cent since the start of 2008.

Losing $800 to $900 million per month.Losing $800 to $900 million per month.

LAW & ORDER LAW & ORDER SITUATIONSITUATION

Bomb explosions and Firing on citizens.Bomb explosions and Firing on citizens.

Gravely affecting social, political, economic and Gravely affecting social, political, economic and religious fabric of Pakistan.religious fabric of Pakistan.

Talented people are leaving the Land of the Pure Talented people are leaving the Land of the Pure for good because their fate is in the doldrums.for good because their fate is in the doldrums.

Thus menace of “Brain Drain” is continuously Thus menace of “Brain Drain” is continuously depriving the country of the intellectuals that are depriving the country of the intellectuals that are the true assets the true assets

Our tourism industry is in the doldrums Our tourism industry is in the doldrums due to security concerns.due to security concerns.

In January and February 2008, a large In January and February 2008, a large number of people living abroad, including number of people living abroad, including foreigners and Pakistanis, visited Pakistan; foreigners and Pakistanis, visited Pakistan; however, the number has decreased in however, the number has decreased in March.March.

A large number of people from Pakistan A large number of people from Pakistan went abroad went abroad during March.during March.

Affecting areas likeAffecting areas like Local businessLocal business Foreign investmentsForeign investments SportsSports Entrepreneurship opportunitiesEntrepreneurship opportunities Development projectsDevelopment projects Civil lifeCivil life

SITUATION IN NORTH SITUATION IN NORTH PAKISTANPAKISTAN

Only 14 foreign tourists visited the Only 14 foreign tourists visited the museum in May and June, two museum in May and June, two busiest tourist months.busiest tourist months.

Tourism has dropped 95%.Tourism has dropped 95%.

The Frontier province has lost $40 The Frontier province has lost $40 million in the past five years, almost million in the past five years, almost $8million a year.$8million a year.

Prolonged political uncertainty, Prolonged political uncertainty, Fragile economic situation,Fragile economic situation, Deteriorating law and order in the northern Deteriorating law and order in the northern

part of the country, andpart of the country, and The US threats of direct attacks in tribal The US threats of direct attacks in tribal

areasareas

Have not only shattered the confidence of Have not only shattered the confidence of foreign investors but also forced domestic foreign investors but also forced domestic investors to pull out of the equity markets.investors to pull out of the equity markets.

Local Investors have lost billions of rupees Local Investors have lost billions of rupees with a single investor having reported 13 with a single investor having reported 13 million alone.million alone.

DOMESTIC ISSUESDOMESTIC ISSUES

The World Economic Forum put The World Economic Forum put Pakistan at number 91 out of 125 Pakistan at number 91 out of 125 countries in the global race for countries in the global race for competitiveness.competitiveness.

48 ranks behind India (at No. 43)48 ranks behind India (at No. 43)

Nine critical factors were highlighted.Nine critical factors were highlighted.

1.1. Institutional Infrastructure.Institutional Infrastructure.2.2. Macro-Economy (86Macro-Economy (86thth))

• Low levels of per capita incomeLow levels of per capita income• High incidence of povertyHigh incidence of poverty• UnemploymentUnemployment• IlliteracyIlliteracy• Widening gap of trade accountsWidening gap of trade accounts

3.3. Health and Primary Education (104Health and Primary Education (104thth))• Almost 3 to 4 per cent of the federal budget is spent Almost 3 to 4 per cent of the federal budget is spent

on the education sector.on the education sector.

4.4. Market Efficiency (54Market Efficiency (54thth))• Free-market mechanism,Free-market mechanism,• Positive role of regulatory bodies,Positive role of regulatory bodies,• Conducive macro-economic policies,Conducive macro-economic policies,• Meaningful incentives,Meaningful incentives,• Trade liberalization, Trade liberalization, • Financial deregulation,Financial deregulation,• Corporate governance, and Corporate governance, and • Political commitmentPolitical commitment

5.5. Technological Readiness (89Technological Readiness (89thth))

6.6. Health and primary education Health and primary education (108th): The present government (108th): The present government had sanctioned Rs450 million for had sanctioned Rs450 million for PSDP in the current budget.PSDP in the current budget.

7.7. Poor Work EthicsPoor Work Ethics

8.8. Business SophisticationBusiness Sophistication

9.9. InnovationInnovation

GLOBAL ISSUESGLOBAL ISSUES

Global Financial CrunchGlobal Financial Crunch America saw two of its legendary America saw two of its legendary

firms bite the dust over the weekend.firms bite the dust over the weekend. Some foreign banks have been asked Some foreign banks have been asked

to cut down their exposure in to cut down their exposure in Pakistan.Pakistan.

The market was short of dollars also The market was short of dollars also because of the State Bank’s buy/swap because of the State Bank’s buy/swap operations. operations.

Cont…. Cont….

SUBPRIMESUBPRIME The subprime virus has truly gone The subprime virus has truly gone

global. global. Major banks and other financial Major banks and other financial

institutions around the world have institutions around the world have reported losses of approximately reported losses of approximately US$435 billion as of 17 July 2008US$435 billion as of 17 July 2008..

It shook the strongest of economies It shook the strongest of economies forcing countries to intervene to save forcing countries to intervene to save their economies. their economies.

Cont…Cont…

Food Crises.Food Crises. Our economic crisis is driven Our economic crisis is driven

primarily by the global economic primarily by the global economic crisis.crisis.

Food crisis blessing in disguise for Food crisis blessing in disguise for America.America.

For us the food crisis should be For us the food crisis should be much less acute.much less acute.

CONCLUSIONCONCLUSION