Rupee depreciation

The latest speculative attack on the rupee was not unexpected following the State Bank’s announcement that it will shift the entire burden of arranging foreign currency for making crude-oil-import payments on the private sector from Dec 14. 
 
But the assumption that speculators will cause the rupee to fall sharply any time soon, just as they led it to cumulatively lose almost a quarter of its value in 2008, looks weak. The macro economy is stabilising and the IMF is expected to release the third stand-by-loan tranche of $1.2bn shortly. That should shore up the country’s import cover to seven months and reduce pressure on the rupee. We also know that the State Bank’s decision to transfer the burden of furnace-oil and diesel payments to the private sector in January and August brought the rupee under pressure. The exchange rate has depreciated but only gradually, by 0.5 per cent a month, since February because of higher inflation. Barring isolated speculative raids on the currency, the trend should continue during the rest of the fiscal year.



Indeed, gradual adjustments in the exchange rate which reflect inflation in the economy are desirable because a sudden and sharp depreciation of the rupee has many implications. Rapid depreciation can trigger further inflationary pressures in the economy — already a fundamental concern in Pakistan — and eats into the real incomes and savings of the people. Imported raw materials and machinery for industry also become more expensive, hurting productivity and export competitiveness. For the government, depreciation of the rupee means that it will have difficulty in paying back its loans, especially foreign debt, and containing its current and fiscal deficits. Thus, it is crucial for the government to watch Monday’s sudden, though not very significant, drop in the rupee value with concern and protect the currency from speculators. Yet one must acknowledge that a lot depends on the security situation in the country and pledged official capital inflows and foreign investment. If inflows slow dramatically, it will erode the government’s ability to defend the currency, stabilise the economy and attract much-needed foreign investment.