Will the rupee which has slipped from over 64 to a dollar after September 11, will go up by early next year or down? This is of serious interest to banks and individuals who hold $1,765 million against the $3.501 billion held by the State Bank of Pakistan as its reserve. Already some persons disappointed by the fact the dollar is not going up have chased their dollar bonds and are using the rupee in a more gainful manner. They are accustomed to see the dollar going only one way— up and not coming down or staying dollar is just nominal compared to what some of the rupee investments are offering, including Term Finance Certificates.
A strong lobby has now developed which wants the dollar go up and up as in the past so that they can gain by that constantly. This lobby is led by exporters who are to earn $9 billion this year against the target of $10 billion, and they want the dollar to become strong so that they could earn more dollars for each rupee of export.
The second group consisting of those receiving home remittances who got $1.2 billion in the first nine months of the current financial year. They want more rupee for each dollar they receive from abroad or bring in by themselves.
The third group consist of pensioners of the World Bank, the UN and other international institutions who receive their pension in dollars and then convert that into rupees. Together they are quite a number and pretty vocal.
Undoubtedly, the dollar would have come down much further in the Pakistani market if the State Bank of Pakistan had not intervened in the currency market and bought over $3 billion since June, 2001— $2.2 billion last year and a billion dollars this year.
The State Bank did that not only to meet its foreign exchange commitments, including repaying loans but also to meet the clamour of exporters who wanted the dollar to stay higher so that they could get more rupees for their dollars or far more for their exports in rupees to meet the rupee cost of the products they export. If the State Bank had not intervened, the dollar would have come down further and the CBR would have to come up with larger refunds to the exporters which the IMF would have objected to as outright subsidy.
The remittances have increased for a variety of reasons. They are now coming direct, via banks, as the difference between the inter-bank rate and the kerb rate has been vanished. Secondly, the ‘havala’ channels are being discouraged and probed by foreign governments by holding them as possible conduits for terrorism or pumping black money. Keeping money abroad has also become less safer if that is not clean money. And interest rates on deposits at home are still far higher than interest rates abroad. The Pakistani banks have also galvanized their branches for collecting home remittances abroad and dispatching to the recipients quicker.
The Pakistani officials have been cautioning us that the dollar may come down slowly in relation to the rupee. And Commerce Minister Razak Dawood has asked the exporters to be ready for a cheaper dollar or stronger rupee by early next year and not to take a stronger dollar for granted or build pressure for that all the time.
The dollar can go down in Pakistan for a variety of reasons:
1. The unevenly recovering US economy can become weak again as a part of the faltering world economy and that can make the dollar weak. The commercial tussle between the US and Europe can also weaken the dollar.
2. While Pakistan’s overall reserve is $5.267 billion it can become larger. The IMF says what we have is not large enough reserves for the country of our size and it ought to be far more. The State Bank may act on that and build larger reserves by buying dollars from the local market.
3. The external aid is increasing and more and more of that is coming as grants. There is a marked reduction in the external debt, repayments are decreasing, and interest rates on the debt to be serviced is also decreasing. The costly private sector loans have been paid off to a large extent and the balance is only $700 million, says Finance Minister Shaukat Aziz.
4. Some part of the dollar spent by the US forces and the civilian officers in Afghanistan is coming to Pakistan. Visiting Americans are also spending their dollars in Pakistan.
(5). A part of the dollars spent on the economic reconstruction of Afghanistan will also end up in Pakistan to buy various goods or procure different services.
6. Privatization of various small and large public sector units should also result in substantial foreign exchange earnings over a period of time beginning with the present.
The government too has a vested interest in a strong rupee. Its external defence expenditure becomes low and so is the cost of maintaining embassies and sending out missions to various countries.
The cost of new public sector projects with imported machinery or other equipment as for producing electric power, hydro or otherwise, will become lower.
The government’s transportation needs will also come down as the vehicles become cheap and petrol and diesel oil less expensive.
Above all, the cost of serving the left-over foreign loans will be lower, both as interest rates come down and the exchange rate becomes more favourable.
As against such manifold gains the government would lose some amount of import revenues as the rupee cost of such imports come down and the taxes along with that, particularly when the average import tariff is to come down to 25 per cent from 30 per cent from July 1. This is a small loss compared to the far larger gains in other areas to the government.
Anyway, it was too hurting to Pakistani pride to see their rupee not only below India’s rupee for a dollar at 68 but also Bangladesh’s 57.25 taka for a dollar. And that has to be corrected after almost three years of military rule. And if that is coming to pass now that is indeed very welcome.
A cheaper dollar or a stronger rupee is welcome to the people in their own personal dealings. Foreign education of their children will cost less. Foreign travel will cost less. And the more intellectually inclined will find foreign books cheaper while these are forbiddingly expensive now.
The exporters’ fear of the strong dollar are misplaced in the long run. Most of the exporters are manufacturers themselves particularly in the textile and leather sectors. And they will find the machinery for expansion and modernization become cheaper and their products more competitive in quality and price. They need cheaper and modern equipment for survival and for that they need a stronger rupee.
Above all, the people will find imports as a whole become cheaper both because of the lower import cost as well as the reduced import duties. They need cheaper cars or other expensive equipment at lower cost.
Eventually those who receive home remittances or pensions from abroad will find their losses have been made up by the fall in prices of imported goods in particular and prices in general.
A hopelessly weak rupees upsets the economy all round. That must be combated and that a reasonable strength of the rupee maintained.
We need not keep the Pakistan rupee weaker than the Indian rupee needlessly. India broke off trade with Pakistan in 1949 arguing that our rupee was stronger than India’s as we had refused to devalue the rupee. And now when we have an opportunity to strengthen the rupee that must be achieved and sustained in the coming years.
The rupee is an index of our economy and a strong rupee can reflect the strength of the economy after may years of continued weakness and inexcusable neglect of the rupee.