01 November 2004	Monday	17 Ramazan 1425

On 12 October 1999, a US dollar was worth Rs54.34. By 10 September 2001, the rupee had depreciated to Rs67 for-a-dollar quite in line with its historical pattern of depreciation of around 10 percent a year.

Then came 9/11. Exactly 45 days after September 11, the US Congress-with virtually no debate - passed the USA Patriot Act.

Under the Act, the FBI began racial profiling of Muslim Americans. An undeclared number of Muslim Americans were detained either by the FBI or the Department of Homeland Security merely on the basis of their religious beliefs or ethnicity. Under the Act, the Department of Justice detained an additional five thousand Arab, South Asian or Muslim Americans. Under the Act, surveillance laws got amended in a way that US government agencies acquired expanded powers to spy on their own citizens, primarily Muslim Americans.

For the first time in a hundred years, Pakistani Americans felt vulnerable. During FY 2000-01, Pakistani Americans had repatriated a meager $134 million. Thanks to the USA Patriot Act, the repatriation figure for FY 2001-02 jumped to $778 million, a colossal increase of 481 percent. The following year, Pakistani Americans sent back an additional $1,237 million, a year-over-year increase of 59 per cent. The SBP's figure for FY 2003-04 shows that Pakistani Americans sent back $1,225 million, a decrease of nearly 1 percent over the previous year.

There also is evidence that Pakistanis who had parked part of their wealth in U.A.E. banks were bringing some of their dollars back. The SBP's figures for FY 2000-01, 2001-02, 20020-03 and 2003-04 are $190 million, $469 million, $837 million and $597 million. In effect, post-9/11 repatriations from the U.A.E. increased by 147 percent, 78 percent and then a year-over-year drop of nearly 30 percent, respectively (the drop is partly because of an increase in informal transfers as the kerb market premium has made a comeback).

Another major source of our dollars-after Pakistani Americans and U.A.E. dollars coming back-has been the US government. Consider, for instance, that a year prior to 9/11 US assistance to Pakistan amounted to a paltry $91 million. For FY 2002, 2003 and 2004 (America's fiscal year begins October 1), US assistance to Pakistan amounted to $1,151 million, $513 million and $390 million, respectively.

As a consequence, by the 1st Anniversary of 9/11, the once-mighty dollar had lost an unprecedented 12 percent-the equivalent of Rs8 for a dollar-of its value against the once-feeble rupee. On 11 September 2002, a dollar was worth Rs59 and on 11 September 2003 the Rs-$ parity hadn't nudged much and a dollar could be exchanged for Rs58.

On 28 August 2004, President Musharraf administered the oath to the new de-jure head of the government in a ceremony at the Presidency. Just when the oath was being administered the post 9/11 dollar bonanza was breathing its last breath. The rupee is feeble once again. Since that day in August the rupee has lost 4.5 percent of its value (since the beginning of the current financial year, the rupee is down by a wholesome 5.5 percent).

The rupee's future is far from promising. The third quarter of FY 2003 had a healthy balance-of-payment surplus of $1,288 million while the third quarter of FY 2004 incurred a deficit of $79 million. What a turnaround for the worse! The latest deficit is still small but the direction is nothing less than alarming.

The trade deficit for July-September FY 2005 amounted to $839 million up from $145 million in the same period last year. Exports are increasing at a rate of 17 percent while imports are going up by 38 percent. The trade deficit for the current fiscal may therefore end up a much larger than the expected $5,000 million.

Gazing into the crystal ball, the demand for dollars is increasing at an increasing rate. The rupee as a result is bound to loose more of its value. Here are some of the major culprits:

First, the termination of the Saudi Oil Facility (which financed more than 22 percent of Pakistan's oil import bill during the last five years). Under the Facility, we were getting up to 100,000 barrels of oil on a deferred-payment basis (the deferred-payment plan was later converted into a grant). Now that we would have to pay for all the oil that we consume, the SBP is going to need an additional $1,000 million to $1,500 million.

Two, we are short on wheat. A million tons of wheat is going to require $250 million. An additional half a million tons an additional $125 million.

Three, the international price of crude has been making new historical highs for the past several weeks (petroleum is our single largest import). For July-Sep FY 2005, our oil import bill amounted to $944 million, 38 percent higher than the same period last year. A 10 percent increase in the price of crude would translate in an additional annual outlay of $250 million; a 20 percent crude price increase shall mean coming up with an additional $500 million.

Four, Pakistanis have once again started sending their savings out of the country. Dollarisation is making a comeback, and Pakistanis are buying real estate in Dubai.

Even more dollars will be required to buy tea, palm oil, road motor vehicles and insecticides. As the rupee looses value Pakistanis would have to put up with an increasing rate of inflation. And, as the price of crude keeps on going up the Government of Pakistan would have to axe her GDP growth projection down to a more realistic 6 percent or under.

To be certain, there also is good news. Net foreign investment increased from $39 million in 3Q-FY03 to $793 million in 3Q-FT04 (the figure for 3Q-FY04 includes proceeds from the sale of a $500 million Eurobond issue). The Ministry of Finance is now planning on issuing 'Sukuk Islamic bonds' to bring in $500 million. Additionally, oil and gas exploration continues to attract a lion's share of foreign investment while the communication sector brought in $220 million and the sale of HBL brought in an additional $245 million.

Overall, the demand for dollars far outweighs the supply of dollars and that's bad news for the once-again beleaguered rupee. Too few dollars, too many rupees chasing them! May be the rupee is going where the rupee has never gone before.