Rupee in free fall

The rupee continues to slide inexorably against the dollar. In the last few days, the dollar has jumped from Rs 5-6 to Rs 11 and nobody knows where it will settle. Players in both interbank and open markets are struggling to assess the extent of the ongoing rupee slide as the currency continues to depreciate. There is no sign of stability in the exchange rate as the rupee has lost over 4 per cent value against the dollar. The central bank has not issued any instruction for banks amidst volatility in the currency market. Many people have been complaining about the unavailability of dollars in the market. However, Forex Association Pakistan has pointed out that the dollar is available in the open market.

Hedging against the devaluation, some money changers are asking customers that they should make the rupee payment right away and receive dollars later. Major victims of the devaluation have been importers whose business is suffering because of fluctuations in the exchange rate. Exporters have also started withholding the proceeds of their exports, which is causing a shortage of dollars. In a statement a few days ago, the central bank had justified the sudden devaluation in the exchange rate, calling it a “market-driven adjustment
However, exporters find the situation to their advantage. We know that export receipts fell from $25 billion to $20bn in the last four years. According to exporters, the recent devaluation will help exportable products become more competitive in the international market. All Pakistan Textile Mills Association has also rejected the notion that the devaluation will make imports costlier because imported components are less than 10 per cent in textile exportable products. It is relevant to note here that the textile industry is set to import about 2 million bales this year.

But there is a different reaction from the importers community. Their complaint is that the government had only a few days ago said that there would be no devaluation; and now there is a 4pc drop. They also challenge the view that the devaluation will stop the rapid increase in imports because it takes more than just devaluing the rupee to restrict imports and increase exports. On the other hand, the devaluation reduces our purchasing power parity, increases inflation and swells the debt per capita. The costly imports of petroleum products will ultimately translate into a higher cost of exportable products also.

According to some experts, the current situation shows that dollarisation is in the offing which is not a good sign for the economy. In any case, the uncertainty created by the sudden devaluation of the rupee must come to an end as soon as possible. The massive fluctuations must be controlled and the exchange rate adjusted to create a balance in the market. The present market movement is not solely based on demand and supply conditions, which calls for the State Bank to intervene to check speculative or monetary pressures.

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Mian Bilal