Pakistani Rupee falling off the Cliff

By | November 22, 2013

usd savingsYesterday I went to the bank, took out my savings and converted them into dollars which I have placed under my mattress, since given the party that’s in power it does not augur well for leaving the dollars in the bank. Hindsight is twenty: twenty as they say, I would have been at least eight percent better off if

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I had done the same as of 1 June 2013, the day the Nawaz government were given the reigns of power. However, the estimates in the market range from 115 – 127 by end of this financial year – by that standards I am still doing well cutting my losses by setting a stop loss as they would say in the markets.

Currency devaluation means that the value of the home currency goes down so to purchase the same foreign good as before you will have to pay more. The determination of the price of the currency is set by the simple economics law of demand and supply or primarily the direction of trade volume the country has vis a vis other countries. The devaluation in the Pakistani rupee is the result of deteriorating balance of payments of the country. The balance of payments consists of two components: the current account and the capital account.

In the case of Pakistan the current account deficit is mounting; since the value of exports minus the value of imports is negative despite higher worker remittances, $14bn in FY13, we are seeing year on year. Pakistan imports are around $40bn – the largest item being petrol and related products at $14bn, followed by agricultural and chemicals at $6bn, food and machinery groups at $4bn respectively. Pakistan exports which are around $24bn consist 50 percent of textiles with the remainder coming from foods, and manufactured goods such as footwear, leatherwear, etc. for the past 3 years exports have remained around the same usd value despite depreciation which generally helps exports. FY13 current account deficit was around 1% of GDP and this is expected to worsen this year. So while this is the sad state of the current account there is not much hope from the capital account.

The capital account consists of foreign direct and portfolio investment flows, government and donor flows. There are not enough positive financial flows into the capital account to help us maintain BOP stability. It is in order to maintain this stability of the BOP which enhances Pakistan’s reliance on foreign flows; hence the importance of the Coalition support funds, donor funds, 3G licenses and the eternal talk of the dollar 800m to be received from Etisalat and the desperate desire by the PML-N government to obtain funds from the IMF.

Problem: A large number of the import products are inelastic and need to be imported regardless of price; $800m from

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Etisalat and the money from the 3G licenses has been talked about for the past 5 years and so far has not been forthcoming; IMF funding, given to the government under the 3 year extended fund facility in September 2013, does not even cover current IMF repayments being made. The increase in interest rates will provide very immediate short term stability to the PKR but longer run structural changes need to be made by the government to balance the country’s books, including promotion of exports, increasing home remittances, ensuring increase in foreign direct investment and reducing reliance on foreign external debt.

So on a personal note until the government gets its act in order I can’t keep those dollars under the mattress…so I am looking into investing either in gold or real estate.