Ru­pee de­pre­ci­a­tion

The Pak Banker - - FRONT PAGE -

Creep­ing de­val­u­a­tion is upon us. Two days ago we saw the ru­pee clos­ing at 115.4 against USD, a fall of 4.4 per­cent in a day. This fol­lows the fall of 4.7 per­cent to Rs 110.5 in De­cem­ber 2017. Ac­cord­ing to ex­perts, the cu­mu­la­tive 9.4 per­cent de­pre­ci­a­tion against USD is go­ing to help boost ex­ports and slow­down im­ports growth. But the im­pact on re­mit­tances re­mains un­clear. In a nut­shell, this would let the cur­rent ac­count deficit to marginally thin and help the cause of ad­dress­ing ex­ter­nal woes. The CAD in Feb18 is down to $1.24 bil­lion from $1.67 bil­lion in Jan­uary - the im­pact of de­pre­ci­a­tion on CAD is al­ready vis­i­ble.

The im­pact on in­fla­tion would be less than the quan­tum of de­pre­ci­a­tion. Since ma­jor com­modi­ties prices (part of CPI bas­ket) are al­ready at pre­mium to in­ter­na­tional prices, in­fla­tion­ary con­se­quences of de­pre­ci­a­tion would re­main sub­dued. Head­line in­fla­tion has re­mained low since Dec17; and the trend may con­tinue. Since the price ad­ver­sary is low, the dent on eco­nomic growth would not be much due to fall of ru­pee. How­ever, it is per­ti­nent to note here that the equa­tion of growth and in­fla­tion can turn ugly in case of too much de­pre­ci­a­tion. And that is not good for ex­ports as the mar­ginal im­pact of cur­rency fall di­lutes with in­cre­men­tal de­pre­ci­a­tion. How­ever, im­ports can keep on fall­ing against higher de­pre­ci­a­tion but at a higher cost of break­ing GDP growth mo­men­tum, which is not de­sir­able.

The more im­por­tant ques­tion is how much de­pre­ci­a­tion is war­ranted. For eval­u­at­ing that there is a need to see the im­pact of cur­rency fall rel­a­tive to trad­ing part­ners. The in­dic­tor best cov­er­ing this as­pect is Real Ef­fec­tive Ex­change Rate (REER). The REER was at 124.1 in Nov17 and it has come down to 115.1 on Jan18. The de­pre­ci­a­tion against USD, be­fore yes­ter­day's de­pre­ci­a­tion, was a mere 4.7 per­cent while the REER is down by 7.8 per­cent. The rea­son for higher REER drop is that the USD is weak­en­ing against global cur­ren­cies and de­pre­ci­a­tion of PKR against Euro, Bri­tish Pound and Ja­panese Yen was 9.2 per­cent, 9.4 per­cent and 11.4 per­cent, re­spec­tively.

Af­ter the lat­est de­pre­ci­a­tion, as­sum­ing ru­pee dol­lar par­ity con­tin­ues to hover around 115-116 level, the cu­mu­la­tive de­pre­ci­a­tion against USD be­comes 9.4 per­cent, while against other three cur­ren­cies, reaches 14.5 per­cent, 14.7 per­cent and 15.9 per­cent, re­spec­tively. This will make REER come down to 110 level in a month or two. And if the USD con­tin­ues to weaken, a likely out­come, against other cur­ren­cies, by May-June REER would ad­just fur­ther down to 105. That is a de­cent num­ber and another around of sim­i­lar ad­just­ment of the ru­pee against USD by June end would bring the REER to its equi­lib­rium value - square 100 mark.

But the IMF is more con­cerned on the ex­ter­nal woes; as per IMF lat­est coun­try re­port, the net in­ter­na­tional re­serves were mi­nus $724 mil­lion in Feb18 ver­sus $7.5 bil­lion in Sep16 when the Fund pro­gramme was con­cluded. The fall of $8.2 bil­lion in 18 months is a cause of con­cern and the fund would look at it closely and may push author­i­ties to de­pre­ci­ate ru­pee fur­ther. The need is to keep the cur­rency at cur­rent level (Rs 115-116 per USD) till June and if needed, take it down to Rs 120 per USD and then sit tight to reap the fruits of de­pre­ci­a­tion. Any fur­ther slide in cur­rency from Rs 120/USD would be coun­ter­pro­duc­tive.

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