Rupee devaluation not the solution.
It is also known as a situation in which any move that a person or government can make will lead to trouble. To continue depreciation of Pak rupee and appreciation of US dollar forced the hike across the country so the business community and political leaders have demanded immediate intervention of State Bank of Pakistan to check freefall of rupee whereas the International Monetary Fund (IMF), the international lender, has advised SBP to continue exchange rate flexibility to facilitate external adjustment to support exports and economic growth. It is also another factor that the rupee devaluation might be in line with the demand of the IMF which has always advocated a flexible regime to allay balance of payments difficulties.
The rupee depreciated around five per cent against the US dollar in interbank foreign exchange market in recent days. In open market, rupee traded at 111.80/112. Thus, the dollar has gained Rs7. The rupee was Asia's most-stable currency since 2014 until the recent weakness.
Traders and dealers said rupee was broadly lower as the currency's fluctuation kept the market participants uncertain about whether there would be gradual increases or rupee would find stability at the 110 level. The rupee, which has mostly traded in a tight range of 104-105 per dollar since December 2015, shed over five per cent in the past three sessions. The business leaders have warned that depreciation of the currency by five per cent against dollar in a few days has impaired all the sincere efforts to stabilise exchange rate since last many years, while the common man is facing increased hardships.
Recently, the government had imposed Regulatory Duty (RD) on more than 700 items without any consultation with stakeholders. Traders pointed out that RD on such items added to the cost of production of importable and exportable products which are already losing ground in international markets because of their un-competitiveness. Lahore Chamber of Commerce and Industry (LCCI) has demanded immediate intervention of SBP as rapid devaluation would lead to lower industrial productivity, surge in debts, harm already struggling exports, inflation hike and reducing the purchasing power of the masses that would pose serious challenges for the economy. The sudden devaluation of rupee has raised complexities for all economic sectors. The surge in dollar price will increase the import bill as prices of all imported oil, raw material and other essentials will go sky high.
Dr Shahid Rasheed Butt, Patron Chamber of Small Traders Islamabad, and former president ICCI, says that 'our export sector has been addicted to subsidies, tax breaks, bailouts, and currency devaluation and the recent development will deprive them of incentive to upgrade machinery, improve quality and find new markets.
FPCCI officials said that the recently-adopted exchange rate policy is imperfect which has resulted in economic losses and increased uncertainty among the masses and business community.
There should be a limit to the erosion in the exchange rate so that masses can be saved from the looming flood of inflation as it will force millions more to live below the poverty line as depreciation of rupee will increase the prices of some items up to 20 per cent.
Zubair Tufail, president of FPCCI, says that businessmen are worried over a massive depreciation of rupee in the last few days and warned this will have a devastating effect on the 'already beleaguered' economy.
"The depreciation will increase the prices of all the essential items and inflation will go sky high," he said. The FPCCI president advises the SBP to intervene and check the currency depreciation. The government is also advised to reduce cost of energy instead of allowing flexibility in exchange rate.
Forex Association President Malik Bostan says the dollar price would increase alarmingly if the SBP did not intervene, adding that the federal bank must announce maintaining the dollar price at Rs110-112 otherwise the speculators would take advantage of the situation. A former central bank's governor said the authorities have been forced to let the rate depreciate a bit because of a massive loss in reserves and insistence of the IMF and the World Bank.
"But still the rate remains overvalued to the extent of about 15 per cent," Mohammad Yaqub, ex-governor SBP said. "It is wrong to assert that the rate is market determined. It moves only when the SBP gives signal to the market and that also to the extent dictated by the Ministry of Finance."
He said overvalued exchange rate discouraged exports, encouraged imports and kept the rupee cost of foreign debt servicing below what it should be under an appropriate level of the rate of exchange. "The recent rate change will have minimal impact either on imports or on exports because the rate is still substantially overvalued."
Yaqub said a partial rate correction will increase the rupee cost of foreign debt payment, "but the government will still enjoy an implicit subsidy in its expenditure on foreign debt payment due to the remaining overvaluation".
"The increase in rupee debt payment cost should be treated as a partial reduction in the subsidy to the government rupee expenditure on foreign debt payment through an overvalued exchange rate," he added.