What is the future of the Pakistan rupee, which lost 3.5 per cent against the sliding dollar and closed at 59.43 to a dollar at the end of the year? As last year began it was Rs57.49 to a dollar after a short period of relative stability.
Before the year ended, the rupee had crossed the psychological barrier of 60 to a dollar in October when it touched 61.37. That was the month in which world oil prices had peaked after crossing the barrier of 50 dollars to a barrel.
Thereafter, with the active intervention of the State Bank of Pakistan to rescue the rupee it recovered 2.7 per cent in November and 0.4 per cent in December to end at 59.43 to a dollar as the year ended.
But what matters much more is not how the rupee has fared against the dollar which has lost over 30 per cent in two years against euro but how it has fared against the other strong currencies. The rupee is now 80.44 to an euro and 113.7 to the sterling pound.
And across the border, the Indian rupee is 43.47 to a dollar and is holding itself steady against the dollar with minor fluctuations. An Indian pays Rs16 less for a dollar than we do in Pakistan.
Hence Indian goods, including books, which come here are far more costly than at home. We will feel the difference when we begin trading with India in a big way as a result of the current efforts underway.
The projection now is that the rupee will float between 58.50 and 61 to dollar in 2005, while some see the rupee going down further. The future of the rupee depends on a number of key factors- economic and financial-, apart from the wiles of the money market operators.
To begin with, the extent of inflation in the country matters. When the current year's budget was presented the projection was five per cent inflation. But the July - November figures showed 9.1 per cent inflation.
Dr Ashfaq Hasan Khan, Economic Adviser to the government reckons an eventual inflation at 6.5 per cent this year. And the SBP talks of inflation rate of 7.6 per cent to 8.2 per cent this year. Higher inflation means lower external value of the rupee.
External factors like the high price of oil and food items lower the external value of the rupee. When the current year's budget was framed, the oil import bill was estimated at $3billion from $2 billion estimated the year before. But after the government raised the estimate of oil imports to $3 billion, the prospects are a $4 billion oil import bill or more.
Along with that, the SBP took upon itself to provide the foreign exchange needed for oil imports from its reserve instead of leaving it to inter-bank operations to finance it with all its volatility.
Another factor which would determine the external value of the rupee is interest rate. If the rupee commands a high interest rate, the external value of the rupee will be high. But the SBP policy is to increase the interest rate slowly to avoid disruptions in the market and making export credit costly.
The average rate of lending by banks has been 6.47 per cent and after June last the rate went up to 6.61 per cent. But the rate of interest on deposits has been an abysmal 1.21 per cent which has not changed following the enhancement of the lending rates.
The banks grab for themselves 5.46 per cent to pay its senior officials and meet other lavish expenses. Now, the banks are also paying good dividends to their share holders. And bank shares are usually high priced.
This is an anti-saving policy but the banks are not disturbed as there is plenty of money afloat which seeks the banks for depositing. So, the banks can dictate their terms to the depositors.
The emphasis now is less on saving and more on high priced consumer credit with its monthly rate of interest, which becomes very high if computed on an annual basis. But as more and more banks open and each bank is increasing the number of its branches, more deposits would be mobilized. Within a short time, the PICIC Commercial Bank has set up 10 branches, breaking away from the conservatism of the parental PICIC.
The balance of payments and balance of trade also affect the external value of the rupee. Right at the moment, the external trade has an adverse balance of $2.5 billion.
And that is primarily due to the higher price of oil and the import of 1.5 million tonnes of wheat. Overall imports went up by 50 per cent in this period while exports rose by only 11 per cent. But then 25 per cent of the imports is machinery for future economic expansion.
When the exports are below the target, the exporters usually clamour for devaluation of the rupee or for a cheaper rupee so that they can export more. But there is no such outcry at the moment as the exporters are preoccupied with exploiting the advantages of the post-textile quota world born on January 1. Their export credit is still very low with the SBP providing funds to the banks at 3.5 per cent interest.
The revenue picture can also affect the future of the rupee if the government borrows excessively from the market. But the revenue picture is very comfortable for the government with the revenues exceeding the previous year's collection by 17.6 per cent during the half year ending December 31.
Home remittances which have improved greatly after 9/11 are also steady and are adding to the balance of payments. The government would like the remittances to touch $5 billion instead of staying just under $4 billion which itself is marked improvement over the performance of the 1990s.
Heavy lending by the World Bank and the Asian Development Bank has improved the balance of payments along with the enhanced US aid out of the five-year package of $3 billion in a five-year period.
Government should be getting far more contributions from the US for the large efforts it is making in the US war against terror. The governor of the Reserve State Bank of India says India does not buy dollars from the market to build its foreign exchange reserve which has crossed $120 billion.
And unlike Pakistan, India is not keeping most of its reserves in dollars. It has a mix of strong currencies including euro and yen. But Pakistan's reserve of $11.7 billion is largely in dollars. As the dollar went down against the stronger currencies, the value of our reserve euro and yen also went down. And now that the US is not willing to shore up the dollar and instead wants it go down further to boost its exports, Pakistan should be shifting a part of its reserve to euro and other strong currencies.
Overall a strong rupee is a reflection of a strong economy. And as the Pakistan economy gets stronger, the rupee should not go down due to excessive inflation at home, while external factors like high price of world oil are outside domestic control.
Interest rates on deposits should also be reasonable and encourage and reward savings instead of penalising the depositors for keeping money with the banks. The government and the SBP are now promoting Islamic banking.
How the depositors fare under this partnership scheme remains to be seen. Banks should not be giving an unfair treatment to the depositors in the name of Islamic banking.
Currently, those who hold savings deposits in banks are losers if they do not get 8 to 10 per cent return. That is the real inflation rate and their deposits depreciate annually to that extent due to inflation. If they get 1.25 per cent to 2 per cent as interest on their deposits, their deposits depreciate to the extent of 6-8 per cent.
They were losers even when the interest rate of deposits were 5-6 per cent, and far more now when the average return on deposits has come down to 1.25 per cent. They have been swindled all the time in Pakistan because of high inflation and very low return on deposits.