Saturday, October 5, 2013

Useless Advantage of rupee Depreciation

“Someone’s pain is someone’s gain”. A famous proverb I am quoting here just to enlighten a fact about what’s going here in our lovely country. Policy makers are trying to reduce budget deficit. For this purpose they are using different tools like increase in taxes, printing money and taking loans. The first two tools are reasonable and the last one can be dangerous. But one disadvantage with printing of money is it devalues rupee and as a result inflation increases. Same case is going here in Pakistan, inflation is touching its peaks and rupee is depreciating against US dollar day by day.

The rupee fell sharply against dollar in the currency market during the last month. In the interbank market, rupee lost 61 paisa in relation to dollar for buying at Rs 105.68 and it also fell by 62 paisa for selling at Rs 105.72.In the open market it lost Rs 1.10 versus dollar for buying and selling at Rs 106.70 and Rs 106.90. The rupee also came down sharply in relation to euro, losing RS 3.20 for buying and selling at Rs 143.50 and Rs 143.75.The rupee went down steeply versus the dollar due to some speculative buying of dollars. Since the new government came in to power, the rupee has lost over 7 percent against the dollar. The rupee has touched low level at Rs 107 versus the dollar.

Present situation of rupee have raised many questions and have badly affected Pakistan economy. Import products prices are increasing with increasing rate and people in Pakistan are suffering from this uncertain situation. Anyhow as we know every action has a reaction or every action has some good and bad aspects. Some investors in economy are going to better off. So, can anyone answer me that who will be happy about the deteriorating value of our precious and respected rupee? Yes there are some people in the economy who are happy with deteriorating nature of rupee. Economic theory suggests exporters should be laughing over this phenomenon. While being introduced to economics for the first time, we’ve all been taught that a weaker domestic currency brings down the international price of that country’s exports goods, thus making them more competitive and cheaper in global markets. The demand for domestic products increases and hence it causes to enhance our exports and increase in foreign exchange reserves as well.

On the other hand, imports get dearer. So over time an economy whose currency is dwindling cuts back on imports and boost up exports thus improving its external accounts and creating international demand for its currency. This is also a tool which policy makers use to discourage imports and increase domestic demand for domestic products as well.

But unfortunately in case of Pakistan’s major exports like textiles make known something is wrong. While the rupee is depreciating continuously against US dollar since the start of 2008 and more especially nowadays, the quantity of textile exports has not grown in cycle with the declining worth of the local currency. So what are the main reasons which restrict exports from growth? In textile products many inputs are imported from foreign and stressed value of rupee make them expensive which causes prices of final goods to increase. And hence no positive change in the international market prices of domestic goods which do not attract foreign buyers and exports remain the same. Second reason is political instability and terrorism which discourage foreign investors and compel them to shift their capital outside Pakistan. This affects negatively the overall output level and exports show no positive change. Third and most important reason is energy crisis; reliance on diesel power generators increased and cost of running a factory on a diesel-powered generator is much higher than electricity from the grid. This also results increase in final goods prices and domestic goods become more expensive in international market pushing away buyers and discourages domestic exporters.


By: Muhammad Saqib Yousafzai.

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