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| 29 March 2004 | Monday | 07 Safar 1425 |
The value of rupee
Since its independence, Pakistan rupee has lost so much of its value, it seems difficult to believe that in 1947 the dollar changed hands at Rs3.20! (Incidentally, at that time there used to be 64 paisa to a rupee as against 100 at present.)
Now the dollar is worth Rs57.33. What it means to the common man is that for the imported goods and services that he was buying for Rs100, in the beginning, now he has to pay Rs1,800. In fact, he has to pay more as the unit cost of machinery and other manufactured items keeps increasing faster than the price of agricultural goods.
In the case of agricultural goods that Pakistan exports, the reverse is true, i.e. due to devaluation of the rupee we get Rs100, or a little more due to increase in price, for what was worth Rs1,800 at the time of Independence.
Devaluation of the rupee is one of the major reasons for our huge foreign debt. It should be remembered that at the time of independence Pakistan was not in debt; we had sterling reserves, a part of which was released by Britain every year.
The IMF and other international agencies have been advocating devaluation of Pakistani rupee. Leaving a few earlier years, our economic managers being mostly ex-employees of the IMF, the World Bank, foreign banks or other global financial institutions, have blindly supported the devaluation approach. Various governments have followed the same policy without regard to extreme poverty, unemployment, disease, illiteracy that it caused to the people.
For the last few years, due mainly to the remittances sent by the expatriates, the value of the rupee has stabilized against some currencies while against others it is still declining. The table below illustrates the point:
Currency exchange rates
Authorized dealers rates to public Pak Rupee per currency unit.
Euro Pound Japanese US $
sterling Yen
3.1.2004 72.17 103.05 0.54 57.37
4.1.2003 60.67 93.70 0.49 58.18
6.1.2001 56.26 88.78 0.51 59.00
2.1.1999 39.11 75.64 0.40 45.95
If we go back a little further, on 7.1.1982, pound sterling changed hands at Rs18.95, Japanese yen at Rs0.04 and dollar at Rs9.88.
Euro has registered fastest appreciation among international currencies. In Pakistan it was worth Rs39.11 at the beginning of 1999. In early 2003 it rose to Rs60.67 and reached the level of Rs72.17 in early 2004.
According to the latest figures, (6/3/04) the rupee has stabilized against euro at Rs70.89. In relation to pound sterling, the rupee has depreciated from Rs68.50 in early 1997 to Rs103.05 in early 2004. The latest figure shows a pound to be worth Rs105.78. Likewise, Japanese yen has risen from Rs34 in early '97 to Rs54 in January,04. Now it has stabilized at 0.51.
The US government has allowed the dollar to be devalued due to its large current account deficit. So, if the rupee has recently maintained its parity with dollar, or has even gained Rs1.67 (from Rs59 to Rs57.33) against the dollar since 2001, this is because of dollar's devaluation in the international market.
However, since 1997 the rupee did depreciate from Rs40.08 to the dollar to Rs57.37, (the latest figure being Rs57.33). Had the State Bank of Pakistan slowed down buying dollars from the open market for building up foreign exchange reserves, and for the repayment of $1.17 billion to the Asian Development Bank, the rupee could have gained more in value. Much publicity was given to early debt retirement but the ADB rate of interest and the amount of penalty paid for this payment has not been disclosed.
Pakistan has since floated eurobond worth $500 million at 6.75% per annum interest, which was oversubscribed. As the borrowings from IMF are cheaper than the current eurobonds, the finance minister's assertion that the bond proceeds would be utilized for repayment of 'expensive loans' is not plausible. Though a bit late, perhaps the government has realized that eurobond rate is high and is trying for a floating rate of 2 per cent less.
The current argument that devaluation of rupee helps export, does not hold good in our case due to a number of factors. Oil, machinery and a large number of input items are all imported.
So, with the decline in the value of rupee, these become costlier, thus increasing the cost of production. In fact, the devaluation of the rupee is having an adverse effect on the economy.
Mainly due to billions of dollars remitted by Pakistanis working abroad, financial stability has been achieved and due to consistency in the government policies, cheaper rates of mark up, industry had started to grow. Machinery imports had recently risen by 19 per cent.
Germany has been the main source of our machinery imports, particularly textile machinery, which becomes expensive due to lower value of rupee. Thus, textile, our main industry, would suffer.
Chinese exchange rate as an example. China has the fastest rate of economic growth in the world. Over a period, it has maintained huge export surplus. Yet it is maintaining the Uan at around 8.27 to a dollar despite pressure from the USA to revalue it so that its goods become expensive. During half century of friendship, it seems we have not learnt from China. A deeper study of Chinese economic policies would be of great help.
A very important point to note is that ours is an agriculture-based economy. With higher cost of diesel, fertilizer and other input, in addition to the high cost of electricity, the farmers are unable to maintain production, what to say of increasing it. As a result, we are becoming poorer.
Here it is proposed to discuss mainly the financial aspect. As stated earlier, Euro rose very fast during the last four years. If the SBP, while building up foreign exchange reserves, had kept say, five billion dollars in euro in the beginning of 2003 when it exchanged for Rs 60-67, it could have gained a large profit by transferring these back to dollars.
The finance minister has been saying that dollar reserves do not generate budgetary funds, but this way a substantial profit could have been utilized for poverty alleviation, education and health.
The timing of a decision is very important but our financial managers either keep sleeping or, to please international agencies like the IMF, the World Bank etc., keep the hard earned foreign currency in dollars only, thus depriving the nation of a large profit.
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