Pak rupee among world’s worst-performing currency

ISLAMABAD: Pakistani rupee is one of the world’s worst-performing currencies, declining by almost 12 per cent since the start of the year and more than 17 per cent after having bottomed out to 152.50 to a dollar in mid-May, local media reported on Tuesday.
According to a media report by the end of 2021 the Pakistan government had to once again turn to the International Monetary Fund (IMF) to put the economy into stabilisation mode. Dawn further reported that the State Bank of Pakistan has taken numerous measures to stabilise the rupee and the Federal Investigation Agency (FIA) is continuously cracking down on hoarders and smugglers to restrict the outflow of the American currency and ease its demand, the flight of the dollar continues.
The Pakistani rupee has depreciated 30.5 per cent against the US dollar in the last three years and four months under the current government of Pakistan Prime Minister Imran Khan.

According to The News International, the value of Pakistani rupee has fallen from Rs 123 against the USD in August 2018 to Rs 177 against the USD in December 2021, a decline of 30.5 per cent over the last 40 months. This makes it one of the highest devaluations of the currency in the country’s history.
Notably, the only other higher devaluation occurred following the falling of Dhaka and Pakistan’s currency was devalued by 58 per cent from Rs 4.60 to Rs 11.10 against the USD in 1971-72.
Former economic adviser Dr Ashfaque Hassan Khan said that there was a complete breakdown of economic policymaking as the country’s fiscal policy had become subservient to monetary and exchange rate policies. He further said that the monetary tightening and exchange rate depreciation resulted in higher inflation, public debt and debt servicing, The News International reported.
Experts opine that the massive devaluation of currency under the Imran Khan government fueled inflationary pressures. They believe that the depreciation of the exchange rate by 30.5 per cent led to higher inflation, the report said. (ANI)

Remittances only way out

The Ministry of Finance — highlighting the increasing current account deficit and higher inflationary pressure as major challenges —has expressed reliance on higher and stabilised remittances in keeping the current account deficit “manageable and financeable”, in its forecast, The News reported Tuesday.

In its Monthly Economic Update and Outlook released Monday, the finance ministry said that “assuming sustained remittance inflows, the improvement likely to take place in the trade balance will be mirrored in reducing current account deficits, allowing for manageable and financeable deficits.”

The ministry’s stance on higher inflation was that the year-on-year (YoY) inflation hiked in recent months. Higher global commodity prices, electricity charges, house rent and transportation costs are among the major contributors to inflation but the government is making administrative, relief and policy efforts to reduce the inflationary pressures in the coming months.

The Ministry of Finance conceded that the current account deficit was touching levels of 2018 when it had touched $18 billion and the PTI had always blamed the former PML-N government that it had inherited an economy in a shambles.

“The current account posted a deficit of $7.1 billion (5.3 percent of GDP) for Jul-Nov FY2022 as against a surplus of $1.9 billion (1.6 percent of GDP) last year. Previously, the current account deficit was $7.2 billion (5.5 percent of GDP) during July-Nov FY2018,” the Ministry of Finance made it clear.

The current account deficit widened due to the constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global prices of oil, Covid-19 vaccines, food, and metals. Exports on fob grew by 28.9 percent during July-Nov FY2022 and reached $12.3 billion ($9.6 billion last year).

On inflation, the Ministry of Finance said Pakistan’s inflation rate is driven by the international commodity prices, exchange rate, seasonal factors, and economic agents’ expectations concerning the future developments of these indicators.

The year-on-year (YoY) inflation has increased in recent months. This increase in inflation is mainly derived from electricity charges, fuel, house rent, transport, and non-perishable food items among the largest contributors.

The price adjustments were directly and indirectly induced by a recent exceptional increase in international commodity prices and exchange rate movements.

It is expected that MoM inflation will soften in December. International oil prices have retreated somewhat from previous highs. The exchange rate continued to slightly depreciate but the government efforts to dampen the pass-through of high international food prices into domestic retail markets continue.

At present, the government aims to increase agriculture productivity by taking multiple initiatives to ensure food security by countering food inflation in the future.

“The low base effect may contribute to keeping inflation rate of December in double-digit. Although, the forecast probability margins are wide, most likely, YoY inflation is expected to remain in double-digit in December but slightly less than the last month’s number,” the Ministry predicted.

According to Balance of Payment (BOP) data, exports of goods and services increased by around 13 percent in November as compared to October. They have now settled well above the 3 billion USD mark and are expected to climb further in the coming months so as to reach a new higher level for the foreseeable future. This strong export performance is the result of several positive factors.

First, although the cyclical position in the main trading partners as witnessed by the Composite Leading Indicators (CLI) seems to stabilize, the underlying growth trend in those countries remains very strong, following the recovery in their potential output growth.

Second, Pakistan’s Real Effective Exchange rate has been improving significantly in recent months.

Third, the domestic economic dynamism remains strong. Fourth, specific government policies to stimulate exports are bearing fruit.

The main risk factor here is the appearance of a new COVID-19 variant, of which the effects on economic activity are still unknown. BOP data further indicated that imports of goods and services increased about 5% in November compared to October.

Strong domestic economic dynamism requires imported energy, capital goods and intermediate goods, necessary in the production process. Furthermore, the recent increase in international commodity prices have inflated the cost of these imported goods. However, imports may settle at lower levels gradually in the coming months.

Imports are indeed expected to react to higher domestic interest rates, given the historically observed negative interest rate effect on import demand.

Furthermore, the government continues on implementing measures to curb unnecessary imports and to supply domestic alternatives in some markets, especially food products. Also, the baseline scenario is based on a downward correction of international commodity prices.

On the basis of these events, the trade deficit will stabilize in coming months. The expected developments in export and import activities imply that the trade balance may gradually improve in coming months and settle down at significantly lower levels in the second half of the current FY.