Rupee Devaluation

RUPEE DEVALUATION AND ITS EFFECTS ON ECONOMY…

Sadia Saeed, Bushra Soomro & Aqsa Shaikh

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Rupee Devaluation And Its Effects On Economy…

Devaluation means decreasing the value of

nation's currency relative to the currencies

of other nations. Devaluation is usually

undertaken as a means of correcting a

deficit in the balance of payments. Some

analyst are of the view that weakening the

value of currency could actually be good for

the economy.

History …


Pakistan had experienced an increased in wholesale price,

after its first devaluation in 1955, due to inelastic

production structure, which had generated uncontrollable

inflationary pressure. Again on 11th May 1972, Pakistani

Rupee was devalued by 56.7% in terms of gold to a new,

unified Official Rate of PRs11.00 per U.S. Dollar and 4.5%

fluctuation range for the currency was also introduced. On

8th January 1982, the Rupee was devalued when the

currency was unhitched from its link to the U.S. Dollar and

the fixed Official Rate abolished Rs9.9 per U.S. Dollar. In

1997, retail prices rose significantly to 20 to 24 rupees/kg

(US 55.4 to 66.5 cents/kg), indicating short domestic

supplies.

History …


The devaluation of the rupee against the dollar

was very high in 1996, which contributed to the

rise in price since sugar had been traded

internationally in US dollars. As imports had

increased in the 2 years period, the rising price

of imported sugar (in rupees) was also reflected

in the rising domestic price. An import tariff of

10 percent was removed in mid-1997, so as not

to contribute to increasing sugar prices. It rose

to very high amounting to Rs64.1 in July 2001.

History …


The economic indicators showed some visible improvement since the year 2001-02 and it continued to be so, which helped the authorities to turn around the creeping devaluation and the rupee has stabilized in the range of (Rs) 59-60 per dollar till 2006 and May 2007 (Rs60), but after that the currency has started devaluing since 2007 to date i.e., April 2008 it was Rs63.40 against a dollar. And after 2008 Pakistani currency is continuously being devalued and now in February 11, 2013 it have reached up to 100 rupees per dollar.

History …

Rupee Devaluation And Its Effects On Economy… Almost over 30 percent depreciation of Pakistan rupee

against US dollar since the beginning of 2008 has nearly halted economic growth in the country, hitting all the important areas of economy from agriculture to industry; manufacturing to import of goods; IT sector to students studying abroad and government should take immediate measures to arrest further devaluation of rupee to avoid more damaging consequences for the economy. President Islamabad Chamber of Commerce & Industry (ICCI) Mian Shaukat Masud said in a statement that depreciation of the rupee is multiplying the cost of doing business and badly affecting the industrial, manufacturing and agriculture sectors as Pakistan has to import fertilizers, food items, oil, machinery and industrial raw material.

Some Comments…

Rupee Devaluation And Its Effects On Economy… He said though the weaker rupee should benefit to

exporters by giving them more rupees per dollar, but this benefit is neutralized by the costly imported inputs of manufacturing sector including textiles thus eroding the financial advantage of a weaker rupee.Our economy is in slump as all sectors of economy are showing negative growth and warned that further fall in value of rupee will cause more contraction in economic activity leading to reduced tax revenue for government and huge foreign debt, Mian Shaukat said and added that the decline in the exchange rate goes on in spite of the fact that foreign exchange reserves have almost doubled, which should be a cause of great concern for policy makers.

Some Comments…

Rupee Devaluation And Its Effects On Economy… He said in this scenario, depreciation of the

rupee at its current pace won’t push up exports, rather will certainly inflate import bill and inflation that, over the years, became closely linked to the exchange rate because of Pakistan’s ever higher reliance on imports, particularly of energy inputs.

Faster the depreciation of the rupee, higher will be inflation and lower the competitiveness of Pakistan’s business and industry. Therefore, government should get quickly into action to arrest this dangerous trend to bring stabilization in exchange rate to protect national economy from further damage, he remarked.

Some Comments…

Rupee Devaluation And Its Effects On Economy… The Pakistani rupee devalued to almost Rs 100

against a dollar on feb 11 2013 because of tightening in the inter-bank market. Under immense pressure for negatives in the country’s external account, the rupee traded between Rs 99.75 and Rs 99.95 on the open market while the inter-bank market saw the greenback changing hands at Rs 98.70 in the afternoon.

“The increase in dollar is because of tightening

on the inter-bank (market),” said Muhammad Shahid Usman, a local currency dealer.

Some Comments…

Rupee Devaluation And Its Effects On Economy… The economic observers tend to attribute

this inter-bank tightening to a fresh decrease of $146 million in the country’s depleting foreign exchange reserves on account of 9th repayment the central bank feb 11 made to the International Monetary Fund (IMF).

“It is a routine gradual depreciation of Pak rupee which is quite expected due to loan repayments and lower inflows,” Khurram Shehzad, a senior analyst at Arif Habib Group.

Some Comments…

Rupee Devaluation And Its Effects On Economy… “Factors like the prevailing poor law and

order, government’s inability to announce the election schedule, lingering talks with the IMF for a fresh loan and the resultant dollar shortfall have panicked the importers and general public,” Malik Bostan, chairman Exchange Companies Association of Pakistan (ECAP),

Some Comments…

Rupee Devaluation And Its Effects On Economy… He also cited “forward deal” as a reason

for dollar’s appreciation alleging that the banks, despite government’s warnings, were doing 6-month advance booking of the greenback by the importers at Rs 101. “They (banks) still are making huge profits out of forward deal with importers who are becoming more concerned over the rupee-dollar parity,” he claimed adding “The forward deal must be banned as it leads to speculative trading of the dollar.”

Some Comments…

Rupee Devaluation And Its Effects On Economy… The widening current account deficit, excessive

government borrowing from State Bank, absence of foreign flows increasing oil imports, lack of foreign investment and repayments to the International Monetary Fund are the vital reasons for constant depreciation of Pak rupee.Worsening economic condition in the country deteriorating law and order situation, energy crisis and terrorism are the main causes of sinking rupee which witnessed sharp devaluation during a couple of years. Consistent balance of payment deficit and daily notes printing of big amount are also some reasons. Daily printing of Rs 2 billion notes, costing each Pakistani Rs11.70 every day.

Reasons Of Devaluation:

Rupee Devaluation And Its Effects On Economy… The price of imports are anticipated to

further increase which will only put maximum burden on the entire economy and the export industry, as the cost of production for the export goods in directly related to the imported good.

Effects …


Exports are not in good condition since the cost of

doing business has gone up in Pakistan and highest

in the region which means less chance for lowering

of trade imbalance. This big size depreciation would

ultimately hit the exports as the imported raw

materials would be costlier. Depreciation of the

rupee at its current stride won't step up exports,

rather will certainly expand import bill and inflation.

It will also lower the competitiveness of Pakistan's

business and industry.

Effects …


If such a trend of record fall of Pakistan's rupee goes on

non stop than the nation may seek loans from the

International Monetary Fund to pay debts. Devaluation

results in a higher cost of large external debts. In

developing countries, most external debt is denominated

in dollars or in another strong foreign currency. If the

currency of a country is devalued which has large

denomination of its external debt in foreign currency,

then both residents and the government need more

domestic currency to pay for the same amount of foreign

debt.

Effects …


This reduces the net wealth and therefore

aggregate expenditure because the

government requires a higher fraction of GDP

to repay its external debt. In consequence,

there exists a trade off between recovering the

economy and increasing the future cost of

repaying the debt thus increasing the

government incentives to default

Effects …

Rupee Devaluation And Its Effects On Economy… External Debt in Pakistan 63662 USD

Million in the fourth quarter of 2012.and in 2013 it reached to 14.3 trillion.

Effects …


Such severe consequences call for an

immediate solution to trap instability in the

local currency market and take immediate

necessary measures to provide support to

exchange rate to resist the steep fall in the

value of rupee.

Effects …

Rupee Devaluation And Its Effects On Economy… ECONOMY Pakistan economy will

continue to remain in un-chattered waters due to political uncertainty, militancy and growing fear of unpredictable policies of the PPP government. GDP will stand at 3.2% by June 30, 2013. Fiscal deficit will remain 6.5% of GDP. Inflation will hover around 10%. Foreign exchange reserves will be $14 billion whereas remittance will $ 13 billion.

Rupee Devaluation And Its Effects On Economy… There are 7 variables; making an impact on

Pak Rupees in 2013 ELECTION YEAR:

This year heralds an economic change whereby government will hold elections under the supervision of army and independent Election Commission of Pakistan. Most parties will get their funding from abroad and lobbies working locally. Most of the spending will thus happen in Pak Rupees and supply of PKR will be more in the market. DEMAND SIDE FOR PAK RUPEES


POLITICAL TURMOILThis economy is going through lot of hiccups and instability, fear and uncertainty thus will make entrepreneurs and people think keep their savings in DOLLAR or Canadian Dollar or Gold. Political instability will have NEGATIVE impact on Pak rupees thus keeping money in FOREIGN CURRENCY attractive and rationale. DEMAND SIDE FOR FOREIGN CURRENCY

Rupee Devaluation And Its Effects On Economy… REMITTANCES

The global economy is getting messier as Europe is deep in recession and US is struggling to come to terms with fiscal cliff i.e. raising taxes and reducing spending and deliberation of Debt ceiling continues. Many Pakistanis are sending their savings back home to avoid losing their funds in European and American banks. Swiss secrecy laws are outdated and authorities are sharing data with various countries as per their jurisdiction requirement. Most Pakistanis will be routing their funds back to Pakistan from other destinations including Dubai, Kuala Lumpur, Singapore, Hong Kong, London and Luxembourg. DEMAND SIDE FOR PAK RUPEES

Rupee Devaluation And Its Effects On Economy… COALITION SUPPORT FUND

Pakistan is expected to get some inflows from the ‘War of Terror’ support money. This will increase the Dollar inflow in the country. $700 million was expected. It will be recorded in DEMAND SIDE FOR PAK RUPEES

Rupee Devaluation And Its Effects On Economy… IMF DEBT PAYMENT

Pakistan needs to make debt payment during the first quarter of 2013. This will put little pressure on PAK rupees since Dollar outflow will happen to meet the debt payment requirement. More than $800 million to be paid. DEMAND SIDE FOR FOREIGN CURRENCY

Rupee Devaluation And Its Effects On Economy… OIL PAYMENT

Pakistan imports huge quantity of oil to meet her domestic requirement. OIL payment needs to be made to keep the oil supplies running to meet the domestic demand. DEMAND SIDE FOR FOREIGN CURRENCY

Rupee Devaluation And Its Effects On Economy… REGIONS IMPACT ON THE PAKISTAN

EXPORTSince our neighboring country India is witnessing a slower growth, she will continue to keep her currency and interest rates low in line with international STRUCTURED DEPRECIATION of currencies. Many countries globally are keeping low interest rates to boost domestic economy, increase exports and keep the growth momentum going in order to bring structural changes to move on the growth trajectory with sustainable economic returns for their people. DEMAND SIDE FOR PAK RUPEES.

Rupee Devaluation And Its Effects On Economy… IN NUTSHELL

In view of the above 7 variables, Pak Rupees will remain choppy in line with the strategies adopted by various countries of STRUCTURED DEPRECIATION to boost exports in the short run to compete with the region. SBP will supply more Dollars to keep the Pak Rupees away from a free fall. There could be capital controls imposed if the economy deteriorates; if election results are not fair. Strikes, social unrest and anarchy situation can’t be ruled out. CAUTION IS THE WORD FOR INVESTORS

Rupee Devaluation And Its Effects On Economy… Government should take immediate measures

to control further devaluation of rupee to avoid more damaging consequences for the economy. Further fall in value of rupee will cause more dwindling in economic activity leading to reduced tax revenue for government and huge foreign debt.In this context the government should speedily halt this grave trend to bring stabilization in exchange rate to protect national economy from further impairment.

Rupee Devaluation And Its Effects On Economy… A long term ambitious plan is required to put the

economy on the right track. This should provide a model for exporting value added branded products, bettering the quality and image of existing products, finding new export markets and better aggressive marketing strategy.

We should try to adequately utilize the human resources, which is sufficient in Pakistan and is not fully exploited. Furthermore, cut in unnecessary government expenditure, improvement in budget and trade deficit, multiple and persistent exchange rate would also be of great assistance. Merely depreciation of currency is not the solution of the current economic crisis and should not be resorted to in near future.

Thank You.

Rupee Devaluation

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