THE rupee lost 10 per cent value against the dollar in the outgoing fiscal year as Pakistan repaid billions of dollars of foreign debts and liabilities including IMF loan installments and remittances of surging profits by multinationals.
The rupee closed at 94.55 a dollar on June 29 on the last working day of FY12 against 85.96 at the end of FY11.
Apart from repayment of $1.2 billion loan installments to the IMF, the country also repaid more than $2 billion of various other foreign loans (princi-pal plus interest) and liabilities, ( including corporate debts), transfer abroad of profits and dividends of multinational companies and salaries and consultancy fees earned by foreign nationals.
Consequently, foreign exchange reserves declined by $3.28 billion or 18 per cent, from $18.24 billion at the end of FY11 to $14.96 billion by the end of FY12 (up to June 22). Suspension of $1.2 billion overdue amount of the Coalition Support Fund by the US, widening of trade deficit and very low level of foreign investment more than diluted the otherwise favourable impact of around 20 per cent growth in home remittances which are estimated to have crossed $13 billion mark for the first time.
Forex reserves held by the central bank came under additional pressure because the SBP had to make a net selling of about $829 million in interbank market in the first three quarters of FY12 to avoid extreme volatility in exchange rates, according to SBP’s third quarterly report.
The 10 per cent rupee depreciation against the dollar also added to the fiscal pressure as it inflated the cost of external debt servicing in terms of rupees besides adding up to the rupee-equivalent of the stock of external debt and liabilities.
Servicing of external debt and liabilities consumed $1.344 billion in first three quarters of FY12. But the rupee equivalent of this amount was much higher than what it should have been had this amount been repaid at end-June 2011 because of a cumulative 5.5 per cent rupee depreciation between July-March 2011-2012.
As a thumb rule 100 paisa fall in the rupee value increases the cost of external debt servicing of a billion dollars by one billion rupees.
It increases the rupee cost of $60 billion external debt and liabilities by Rs60 billion. “But depending upon the timing of the external debt payments the actual difference in the rupee cost could vary based on the actual rupee depreciation during that quarter,” explained a Ministry of Finance official involved in debt management.
Whereas the stock of external debt and liabilities declined in nine months of FY12 (the period for which data is available) from $61.8 billion to around $60.3 billion, in rupee terms these debt and liabilities went up—from around Rs5318 billion to Rs5468 billion because of rupee depreciation, according to the latest statistics reported by the central bank.
“You’ll see a sharper increase in the rupee equivalent of external debt and liabilities as of end-June 2012 (data for which would be out in August) because during April-June quarter the rupee fell steeper than in any of the last three quarters.”
The rupee lost about 4.5 per cent value to the dollar in April-June as external sector woes intensified and the country also repaid $399 million and $107 million to the IMF (in end-May and end-June respectively).
Bankers say unlike in the previous three quarters when the SBP had sold $829 million in the forex market, no unusually large net selling of dollars by the central bank was seen in the last quarter of FY12.
“At least two large local banks and two foreign banks were often seen selling dollars to other banks but whether they were selling on their own or on behalf of the SBP is difficult to ascertain,” said treasurer of a local bank.
Central bankers say though the rupee depreciation adds up to fiscal woes by increasing the budgetary allocation in rupee terms for external debt servicing, growth rates of some items of imports tend to be exchange-rate sensitive and show a declining trend when the rupee goes down.
“You may still see imports growing but imagine what would have been the pace of growth had the rupee not declined. In that event, the trade deficit would have been higher than what it is now and the balance of payment would have been larger than at whatever level it is today,” said a senior central banker.
“A positive thing about FY12 is that the government’s borrowing from external sources remained nil in the first three quarters,” he added, without commenting on whether the trend continued through the last quarter as well. “When you meet all foreign obligations regularly, even if it means rupee depreciation, but lowers the volume of external debts and liabilities, this is good from debt’s sustainability point of view.”—Mohiuddin Aazim