Islamabad slips on dollar crackdown
By Syed Fazl-e-Haider
KARACHI - Government efforts to curb black-market currency dealing in the US
dollar may be backfiring. The difference between the unofficial and official
exchange rates is widening on strengthening dollar demand after the Pakistan
central bank recently made it mandatory for everyone to show their personal
identification card for greenback deals.
The exchange rate for the rupee crossed the 87 mark against the US dollar in
the open market this week, while being traded at 85 in the inter-bank market.
"For the first time in the past one-and-a-half years, the difference in the
exchange rate of the open market and inter-bank market has reached two rupees,"
the News reported, citing Malik Bostan, an exchange company owner. The spread
has recently been
hovering around 170-190 paisas, compared with its historical average band of 15
to 20 paisas.
People are reluctant to sell the US currency to exchange companies because they
do not want to disclose their identity. That is helping to drive up its value
compared with the rupee.
The weakening local currency - as recently as 2008 it was trading at little
more than 61 to the dollar - is contributing to a contraction in economic
activity while promoting smuggling, which is also strengthened by government
increases in import levies aimed, in turn, at offsetting the decline in rupee
value. Critics say dollar demand is also growing due to low vigilance by the
government's investigative agencies in curtailing the unofficial, or
black-market, economy.
Money used for smuggling and other illegal businesses in the black economy by
definition evades taxes and its increased use is evident from the yawning gap
between the US dollar open market rate and the interbank rate, according to the
Business Recorder.
Economists say the government has to find a way of channeling this undocumented
money so that it can contribute to fiscal spending and private sector financing
and so help to reduce Pakistan's dependence on donors and to regain economic
self-reliance.
The government is making efforts to spur official domestic savings, which have
declined by 6.5 percentage points to 14.3% of gross domestic product (GDP) in
the past six years. An increase in domestic savings would help the government
plug its deficit and provide much-needed liquidity to the private sector.
The country's central bank has kept interest rates high to attract savers'
money, keeping its key policy rate at 12.5% in its Monetary Policy Statement
for February and March, also with a view to keeping inflation in check. The
central bank last cut its discount rate in November, by 50 basis points.
The bank's stance has heightened the concern of local industrialists and
traders who contend that keeping the discount rate unchanged will further
increase production costs and help to destroy industries already suffering from
exorbitantly high business costs.
The high interest rate has not prevented the rupee, which lost 23% against the
dollar in 2008, and declined 3.5% in the last six months of 2009, from
continuing to depreciate against all major currencies on a day-to-day basis.
The currency is also devaluing despite a central bank forecast that foreign
exchange reserves will reach US$15 billion by the end of June. Higher foreign
exchange reserves are usually a positive for the exchange rate.
A weakening rupee contributes to inflation at a time when soaring prices of
essential commodities, including foodstuffs, are already making the lives of
the poor and the lower middle-class difficult.
Exchange rate stability is also essential for growth in per capita income. On
the basis of an exchange rate of 61.30 to the US dollar, per capita income
increased to $1,085 in the fiscal year to June 2008 from $926. That was before
the rupee plunged to 80 rupees in the following months amid a worsening current
account deficit that led Islamabad to seek an emergency loan package from the
International Monetary Fund in November 2008. The deficit, which crossed $15.6
billion that year, narrowed to $3.44 billion in 2009.
Some analysts believe the rupee will remain under pressure as the country's
external debt continues to pile up and foreign investors' concerns increase due
to Pakistan's worsening security situation.
Nor has the rupee's free fall helped to increase exports, which have been
stagnant for the past two years. Industry in Pakistan is heavily dependent on
imported raw materials and components. Any increase in the price of such inputs
through devaluation tends to raise industrial costs and reduce capacity
utilization.
"The costs of currency devaluation are many, particularly for a predominantly
importing country like Pakistan," The News reported Faisal Qamar, a chartered
accountant, as saying. "Devaluing your own currency is a direct way of
subsidizing another country's consumption."
The central bank forecasts that overall real GDP growth in the year to June 30
will rise to between 3% and 3.5%, from 2% in the previous fiscal year. With
population growth at 1.9% per annum, the country's real GDP growth of less than
2% indicated a negative growth in per capita income in the fiscal year 2008-09.
Syed Fazl-e-Haider (www.syedfazlehaider.com) is a development
analyst in Pakistan. He is the author of many books, including The
Economic Development of Balochistan (2004). He can be contacted at sfazlehaider05@yahoo.com.
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