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Dollar in question

Is the appreciation of rupee against the dollar a temporary relief or a result of robust economic growth as claimed by the government?

Dollar in question

The sharp appreciation of Pakistani rupee against the US dollar in a week’s time at the level below Rs98 has surprised many across the country, including bankers, traders, and analysts.

A few months ago, when the US dollar touched its peak at Rs108 in the open market, Finance Minister Ishaq Dar claimed the green back currency would soon come back to the level of Rs98. No one believed him then. Dar’s former party member and now his colleague in the National Assembly, Shaikh Rasheed Ahmed, had dared to resign from politics if it actually happened.

And that occurred surprisingly within a week, putting Shaikh Rasheed in hot waters.

It is no secret that the current surge in Pakistani rupee’s value is caused by some heavy inflows of dollars in the country, including a handsome receipt of a fund from Saudi Arabia, amounting to $1.5 billion via two equal tranches in a week. The amount — though unclear if it is a loan or a grant — has arrived in the account of the State Bank of Pakistan (SBP), improving the foreign exchange reserves.

It is expected that reserves would touch $10 billion mark by the end of March when a loan tranche of $550 million from the International Monetary Fund arrives.

The SBP has kept this fund, which is believed to be a soft loan, in a separate account, titled ‘Pakistan Development Fund’. Official sources claim that this amount would be doubled soon as another amount of $1.5 billion would be transferred soon.

But economists say this is not the only reason of rupee appreciation. Pakistan has made arrangements to pay for petroleum products through an arrangement outside the country, which would not be reflected in the reserves, says Khurram Shahzad, Chief Investment Officer at Lakson Investment.

The current appreciation of Pak rupee has caused some concerns among bankers and exporters. Over-appreciation of the currency is not beneficial for the economy in the long term.

The dollar inflow in recent months has improved the foreign reserves position, but Pakistan has to make debt services and repayments to the IMF worth $2 billion during the current calendar year.

“Over-appreciation of Pakistani rupee is not an encouraging sign, so we expect that the exchange rate would be stabilised around Rs100 against a dollar by the end of this year,” says Shahzad.

Economists believe that for a sustainable situation, growth in exports is essential and law and order situation should be improved.

Besides other inflows, recently, Pakistan has received a tranche of $550 million from the previously held Coalition Support Fund (CSF) from the US. Another handsome amount of $2 billion is expected to come in the foreign exchange reserves when 3-G auction is held by early April.

Some bankers, however, fear destabilisation of the economy and currency due to “artificial” increase in the value of Pakistani rupee. For the time being, they say, the rupee is appreciating but there is no solid ground to sustain that position.

The demand for imports would be increased with decline in dollar value which can cause increase in inflation. Exporters would also sustain losses.

On the other hand, traders and importers believe common people would be the ultimate beneficiaries of currency appreciation.

“It is incorrect that exporters would sustain heavy losses as they have already got a good margin in profits, so 10 to 15 per cent depreciation in the dollar value would not be a serious cause of concern for them,” says Muhammad Haroon Agar, former President of Karachi Chamber of Commerce and Industry.

He points out, “it is now the responsibility of the government to ensure that the benefit of currency appreciation is passed on to the masses. At the retail level, benefits are usually not passed on to the masses,” says Agar.

Besides petroleum products, prices of other imported items like electronics, pulses, spices and machinery are expected to come down due to decline in dollar’s value against rupee.

The government takes the entire credit of this situation and claims currency appreciation is due to better performance of the overall economy of the country, including growth in the Gross Domestic Product (GDP) rate and increased inflow of remittances from overseas Pakistanis as well as exports.

Home remittances have shown an impressive growth of 10.95 per cent by crossing the level of $10.24 billion by February 28 as against $9.23 billion inflow during the corresponding period last year. “Exports have surged to $16.86 billion in the first eight months of the current fiscal year as compared to $15.8 billion last year,” says Finance Minister Ishaq Dar at a briefing in Islamabad.

But some economists doubt all such claims and term them cosmetic. They believe the present surge is because of the heavy inflow of funds in Pakistan Development Fund. Also, the government claims to receive $5 billion from the auction of 3-G and 4-G telecommunication services are baseless.

“Everybody in Pakistan knows that Pakistan can fetch not more than $2 billion from the 3-G telecommunication auction,” says senior economist, Dr Shahid Hassan Siddiqui, Chairman Research Institute of Islamic Banking and Finance.

He says the finance minister, during an interview with an international financial magazine, had given a wrong impression of Pakistan’s economy, where, in fact, the government expected to receive foreign exchange money through privatisation of the already profit-making corporations like Oil and Gas Development Corporation and Pakistan Petroleum Limited. These two companies alone had provided the government revenue and dividend worth Rs2 billion last year.

“Privatisation money is for one time and then what will the government do for reserves improvement,” he asks, adding, “In long term, the country would suffer heavy losses as a result of privatisation. The government is still not revealing information about the receipt of $1.5 billion from a friendly Muslim country as on what terms the money is provided to Pakistan — “There is no free lunch in the world.”

Perhaps, he apprehended, the donors would ask Pakistan to do more in the war on terror or provide some military support in Syria. “This would spoil our relations with neighbouring Muslim country Iran, with whom our ties are already strained on the Iran-Pakistan gas pipeline issue,” says Dr Siddiqui.

Despite arguments and counter-arguments, the talk of the town is that rupee has gained its value by more than 10 per cent within short time. Pakistan will benefit — in the petroleum bill and the amount of foreign loans in rupee terms would be less, notes Khurram Shahzad.

He says the current appreciation in Pak rupee has caused some concerns among bankers and exporters. Over-appreciation of the currency is not beneficial for the economy in the long term and it is better to keep the currency at the level of Rs98 a dollar, he concludes.

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