2011: A bad year for Pakistani Currency

Faizan Saleem

The Pakistani rupee remained under intense pressure during the year 2011 and shed 4.82 percent during the year as compared to 1.53 percent in 2010. The higher import payments, repayment of foreign loans, liquidity shortages and weakening macroeconomic situation kept the currency of Pakistan in uncertain position.

The rupee touched to its record low of 90.03 against dollar in the last week of the outgoing year and interestingly, the local currency depreciated by massive 4.5 percent in value during the second half of the outgoing year alone.

The first half of the year proved overwhelming for the economy of Pakistan as major macroeconomic indicators attained improvements. Hence, the rupee remained steady during the initial half of the year on account of strong external account position. However, the second half remained dull due to weak global economic concerns, lower commodity prices, higher average oil prices and impact of IMF’s loan repayment of $1.2 billion on forex reserves.

The foreign inflow also remained slow during the year as the major donor countries facing tough times in their economic circle. Moreover, the relationship between the biggest fund contributors of Pakistan, United States, also touched to its extreme which further aggravated the dollar supply in the economy posing more pressure on Pakistan Currency.

The sluggish growth in exports, due to weaker commodity prices and severe energy crisis in the country, also played its role in currency deterioration. Furthermore, the slow demand of Pakistani products in other countries due to weak global economic growth also aggravated the ailing situation.

The only area which has supported the Pakistan currency has been the remittances sent by overseas Pakistani employed abroad. But, this could also suffer particularly after the weaker global economic outlook and massive increase in unemployment rate of major economic powers of the world.

The current account deficit of the country stood at $2.104 billion in July-Nov compared with $589 million in the same period a year earlier. The deficit is likely to widen further in the coming months because of debt repayments and lack of external aid.

Pakistan has to start paying back $8.4 billion loan to IMF and more than $1.1 billion are alone due in the first half of 2012. Hence, the massive pressure on the foreign reserves is yet to come in the form of repayments of outstanding loans in the second half of the fiscal year, which could further deteriorate on the already weakening position of the rupee.

The situation is expected to remain precarious in later part of the year as the global economic outlook is unlikely to get revitalized and could drive further deterioration on the external front.

PKR depreciation, though a negative, when it comes to its effect on import bill, but it could provide some relief to domestic industries to increase outreach and gain market access. PKR depreciation will have negative impact on current account deficit, inflation, and among specific industries; it will have negative impact on auto sector. But, cement and textile sector may get to increase their exports with PKR depreciation.

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