Saturday, August 24, 2013

India Suffers Rapid Loss of Investor Confidence

Plummeting Indian rupee is the most obvious symptom of the world losing confidence in India. The crisis of confidence is so great that Jim O'Neill, former Goldman Sachs executive whose BRIC acronym made India an attractive investor destination in 2001,  has recently said that “if I were to change it, I would just leave the "C"" in BRIC.

India has long run huge twin deficits. India imports a lot more than it exports, and its government spends a lot more than its revenue receipts. India has so far been able to finance its trade and budget deficits with foreign capital inflows. Such flows have been driven mainly by the easy money policies pursued by the US Federal Reserve and other central banks in Europe and Japan in recent years. Over $170 billion of India's $390 billion foreign debt is due for repayment within a year. India's current foreign exchange reserves are $278 billion, and repaying $170 billion debt will dramatically deplete its reserves causing further panic in financial markets.

The US Fed in Washington has been buying $85 billion worth of bonds with a few computer key strokes every month to stimulate the US economy.

Many investors had been borrowing money in US dollars at extremely low rates to invest their borrowings for higher returns in emerging markets like India.  With  US economic recovery beginning to take hold, the US Fed has signaled that it may reduce or end these bond purchases. As a result of this change, foreign investors are retrenching from the emerging markets to take advantage of better returns in US and frontier markets.

In contrast to big declines in emerging markets like India and Indonesia, some frontier markets such as the UAE, Bulgaria and Pakistan have returned over 50 percent this year in dollar terms, according to Reuters. Unlike in the big emerging economies, listed companies in Kenya or Pakistan tend to be true plays on the emerging market consumer. Earnings growth estimates for this year have risen sharply almost everywhere to 10-15 percent (versus the 9.8 percent average in emerging markets)

In addition to the stellar performance of Karachi's KSE-100 this year, Pakistani euro bonds listed on the Luxembourg stock exchange are also doing well, according to Pakistan's Dawn newspaper.  In the last four months, these bonds have surged by more than 10 per cent (excluding coupon payment), which places them among the best performing in emerging and frontier markets. During this period, yields on the bonds have declined by more than 300 basis points.

India and Indonesia have been specially hard hit because both are dependent on significant foreign inflows to fill their current-account gaps. Foreign investors have already sold a net $11.6 billion of Indian debt and equities since late May, sparking fears of continued weakness, according to Reuters. As a result, Indian rupee and major Indian stock indices have both suffered double digit losses this year. Weakness in the Indian currency, which tumbled almost 15 percent this year, could further fuel inflation, and hurt consumers in an election year. Compared to 2011-12, the Indian GDP has declined by more than $200 billion to about $1.65 trillion this year.

The Reserve Bank of India (RBI), the country's central bank,  has said it plans to buy long-dated government debt to  stabilize markets after rising volatility threatened to hurt an economy that is already growing at  the slowest pace in a decade. But the BRI actions appear to be too little too late.

There does not appear to be any quick fix to the falling rupee and declining investor confidence. The longer term solution lies in containing both the budget and the trade deficits. It will require strong political will to cut spending and reduce imports in the immediate future. Such actions will make the situation worse before it gets better. Will India's ruling politicians muster the courage to swallow the bitter pill so close to the upcoming elections in 2014? I doubt it.

Related Links:

Haq's Musings

India's Hyphenation: India-Pakistan or India-China?

India's Share of World's Poor Jumps as World Poverty Declines

Forget Chindia--Chimerica Will Rescue the World

World Bank on Poverty Across India

Superpoor India's Superpower Delusions

Are India and Pakistan Failed States? 

India Home to World's Largest Number of Poor, Hungry and Illiterate

India Leads the World in Open Defecation

India Tops in Illiteracy and Defense Spending

Indians Poorer than sub-Saharan Africans


Mayraj said...

I am inadvertently responsible for giving Benazir idea for Eurobonds and I regret it.
I wrote to her to ask her to consider muni bonds. She had no interest in that;but decided instead to do Euros and even asked contacted me to find out if I had worked with Jardine Fleming. I hadn't and thought the question was strange. The deal was later found to be a corrupt one. When I told her I hadn't worked with them, I didn't hear from her Govt. again. I also told her to get counsel, which she didn't do. Then it was revealed they didn't provide information they should have-which a bond counsel would have prevented.

Riaz Haq said...

Mayraj: "The deal was later found to be a corrupt one".

Interesting! How was it a corrupt deal?

Mayraj said...

I forget the details;but it was mentioned in the Economist. I forget the details but they got kickbacks from Jardine Fleming, if I remember correctly.

Mayraj said...

JP Morgan now owns Jardine Fleming...

JP Morgan starts trading on Pakistan Stock Exchange

Hopewins said...

A) 25% of External Debt is payable in rupees (NRI accounts), 57% in USD and the rest in mix of SDR, Yen, Euro.

B) NET External Debt = External Debt MINUS Forex Reserves =
390 - 280 = 110 billion$

C) Only 20% of net external debt is Sovereign, the rest is non-government debt.

COMPARE (A), (B), (C) to our situation at SBP, even after the recent IMF bailout and you will see the MASSIVE danger we are in.

Anonymous said...

You seems to have not taken into the account of the advantages of undervaluing currency with depreciation of reserves.

India is importing oil and paying in rupees, and we have food surplus no need for imports in this regard.

The situation is not that bad either.

Riaz Haq said...

Anon:"The situation is not that bad either"

Dismissing the current crisis as "not that bad" and failing to recognize the trend can be disastrous for any economy, not just India's whose serious issues of foreign capital dependence have been known for years.

Ras said...

How India got its funk

India’s economy is in its tightest spot since 1991. Now, as then, the answer is to be bold

IN MAY America’s Federal Reserve hinted that it would soon start to reduce its vast purchases of Treasury bonds. As global investors adjusted to a world without ultra-cheap money, there has been a great sucking of funds from emerging markets. Currencies and shares have tumbled, from Brazil to Indonesia, but one country has been particularly badly hit.

Not so long ago India was celebrated as an economic miracle. In 2008 Manmohan Singh, the prime minister, said growth of 8-9% was India’s new cruising speed. He even predicted the end of the “chronic poverty, ignorance and disease, which has been the fate of millions of our countrymen for centuries”. Today he admits the outlook is difficult. The rupee has tumbled by 13% in three months. The stockmarket is down by a quarter in dollar terms. Borrowing rates are at levels last seen after Lehman Brothers’ demise. Bank shares have sunk.

Anonymous said...

The ironies of India’s economic crisis

A not so funny thing happened while the world was watching for an emerging markets crisis to erupt in China. The crisis erupted in India instead.

Contagion typically attacks weak links first, often exposing vulnerabilities hidden in plain sight. The fall of the rupee exposes India as having the emerging world’s worst fiscal deficit and largest current account deficit in absolute terms.

What went wrong? For much of the past decade, India was celebrated as one of the emerging nations destined to rise indefinitely. Even after the global crisis of 2008, like China and others, it kept growth alive by spending heavily, helped by the easy money flowing out of the US. Behind the scenes, though, the picture was deteriorating, with crony capitalism, government subsidies and inflation rising rapidly.

As early as 2011, money started to flow out of emerging nations as the post-crisis stimulus began to wear off. Economic growth slowed and the flawed structures on which it was built became apparent. The tipping point came in May, when signals that the US Federal Reserve was serious about tapering off its quantitative easing programme triggered a sharp rise in long-term interest rates in the US, drawing dollars home. The trickle of money out of emerging markets turned into a flood. In India, more dependent than ever on foreign capital, the rupee has fallen 20 per cent since May – the largest decline of all emerging market currencies.

The reversal of global money flows has hit particularly hard those emerging markets with a high current account deficit, and leadership that has clung to power too long and lost the will to reform. Along with India, high on this list are countries recently struck by political unrest, including Turkey, Brazil and South Africa. In these nations, the stock market is this year down 10 to 20 per cent, and currencies another 8 to 20 per cent.

Economic growth has now fallen to an average of 4 per cent in emerging nations. In India, it is barely 5 per cent, disappointing for a country with an income of only $1,500 a head, compared with the emerging market average of nearly $10,000.

This is a familiar pickle for India, which has faced a crisis early in each decade since the 1980s. Like leaders in many emerging nations, India’s tend to grow complacent in good times, triggering a crisis, which forces reform, leading to a revival. What is unexpected today is that the crisis phase is unfolding under a leader credited for leading reforms after the 1991 crisis. Prime minister Manmohan Singh, an economist, has been consistently wrong on the economy. He has assumed strong investment and savings rates would keep growth above 8 per cent, and dismissed inflation as the natural price of prosperity and crony capitalism as a normal symptom of early-stage growth, rather than recognising it as the cancer it is.

India’s fundamentals have deteriorated steadily under Mr Singh’s government. Since 2007, the current account deficit has exploded from $8bn to $90bn; it now equals 5 per cent of gross domestic product, twice the level academic studies suggest is sustainable. Meanwhile, many corporations have been on a borrowing binge. Since 2007, borrowing by the 10 most indebted companies has risen sixfold to $120bn, with much of it denominated in foreign currencies. One in four companies does not have the cash flow to cover its interest payments adequately. Total short-term external debt has risen from $80bn to $170bn. There is talk in New Delhi that, for the third time since the crisis of 1981, India may have to appeal to the International Monetary Fund.

Anonymous said...

India has to repay $172 billion debt by March 2014

...India’s short-term debt maturing within a year stood at $172 billion end-March 2013. This means the country will have to pay back $172 billion by March 31, 2014. The corresponding figure in March 2008 — before the global financial meltdown that year — was just $54.7 billion. India has accumulated a huge short-term debt with residual maturity of one year after 2008. The figure has gone up over three times largely because this period also coincided with the unprecedented widening of the current account deficit from roughly 2.5 percent in 2008-09 to nearly 5 per cent in 2012-13. Much of this expanded CAD has been funded by debt flows.

This may turn into a vicious cycle.

More pertinently, short-term debt maturing within a year is now nearly 60 per cent of India’s total foreign exchange reserves. In March 2008, it was only 17 per cent of total forex reserves. This shows the actual increase in the country’s repayment vulnerability since 2008.

Theoretically, if capital flows were to dry up due to some unforeseen events and NRIs stopped renewing their deposits with India, then 60 per cent of the country’s forex reserves may have to be deployed to pay back foreign borrowings due within a year.

A lot of the surge in external debt maturing within the next year is on account of big borrowings by Indian corporates during the boom years after 2004. Corporates became quite heady from their initial growth success and stocked up on huge external debts of 5- to 7-years maturity. The repayment clock is ticking for many of them now.

External commercial borrowings are now 31 per cent of the country’s total external debt of $390 billion as of 31 March 2013. Short-term debt with one year maturity is 25 per cent of total external debt. However, total short term debt to be paid back by the end of this fiscal, which includes a lot of corporate borrowings payable by end March 2014, is 44 per cent of the country’s external debt or $172 billion.

Corporates have managed to roll over their foreign borrowings over the past year because of the easy liquidity conditions kept by the U.S. Federal Reserve. But if the Fed’s easy liquidity stance were to reverse, there is no knowing how Indian corporates will pay back their foreign debt at a depreciated exchange rate of the rupee.

In any case, besides meeting its debt repayment obligation of $172 billion by 31 March 2014, India needs another $90 billion of net capital flows to meet its current account deficit projected at 4.7 per cent of GDP by the Prime Minister’s Economic Advisory Council (PMEAC) for the coming fiscal.

The chairman of the PMEAC, C. Rangarajan, told The Hindu that an otherwise manageable CAD may create a perception of vulnerability in the backdrop of the Fed’s latest stance.

The $172 billion that has to be paid back by March 31, 2014, will no doubt add to this growing sense of unease.

Riaz Haq said...

Here's Guardian on impact of India's economic crisis on the middle class:

In a small house in the Indian capital, a musician was doing the maths. During the good months, when his deft accompaniments to classical or popular vocalists are in demand, sarangi player Ghulam Ali can make as much as R50,000 (£500). The problem for Ali is that he's not sure there will be many good months in the near future.

"Those like us without a regular monthly income are the worst hit," he said, referring to the sudden downturn in the Indian economy that has analysts whispering about a possible full-blown crisis. "For a musician, it means fewer concerts even as everything has become more expensive – food, transport, electricity, cooking gas, even foreign travel. We artists like to eat and dress well, so for my family it means fewer outings, less money for the children's education, fewer acquisitions. No question now, for instance, of buying a computer for my kids."

Ali and his wife, Rozitaskeen, have two daughters and a son, aged 12, 10 and six, and they share a small house with Ali's three younger brothers, their families and his parents. The family is fairly typically middle class, but as a freelance musician Ali also belongs to the overwhelming majority of Indians (estimated at three-quarters of the working-age population) who do not have steady, full-time employment.

These people are the most vulnerable as India flirts with its biggest financial wobble for perhaps 20 years. Not since economic liberalisation unleashed private enterprise in the 1990s has there been such concern.

After the 2008 world economic crisis India recorded 9% GDP growth for at least two years but in recent weeks the rupee has tumbled, losing a sixth of its value against the dollar this month alone. Share prices have fallen, commodity prices are rising, investment is stalling, growth is slowing, and the government is staring at a huge balance of payments deficit. A sense of impending doom is building. Compounding the fears are signs that other emerging economies in Asia are also vulnerable, drawing inevitable questions as to whether this could turn into a repeat of the 1997 Asian financial crisis.

"It is a crisis," said economist Jayati Ghosh. "This is the big one. But it has been building up for a while due to many reasons: the growing current account deficit, the industrial slowdown, the lack of infrastructure development, the negative investment in the economy."

She sees the crisis as evidence that "the model of development which focuses only on GDP growth" has run its course. What is needed now is "wage and employment-led growth".

Riaz Haq said...

Here's Jayanti Ghosh's Op Ed in the Guardian:

So now India is the latest casualty among emerging economies. Over the past 10 days, the rupee has slid to its lowest-ever rate, and the Indian economy may well be on the verge of a full-blown currency crisis. In this febrile situation, it is open season for rumours and pessimistic predictions, which then become self-fulfilling.

This means that even if there is a slight market rally, investors quickly work themselves into even more gloom. Each hurriedly announced policy measure (raising duties on gold imports, some controls on capital outflows, liberalising rules for capital inflows and so on) has had the opposite of the desired effect. Everything the government does seems to be too little, too late – or even counterproductive.

These are all classic features of the panic phase of a financial market cycle. This doesn't mean that a crash is inevitable, but clearly it is possible. The real surprise in all this is that investors and Indian policymakers are surprised. For some reason, they apparently did not foresee this turn of events, even though the story of every financial crisis of the past, and many in the very recent past, should have caused some nostrils to twitch at least a year or two ago.

The Indian economy has been in trouble for quite a while already, and only wilful blindness could have led to ignorance on this. Output growth has been decelerating for several years, and private investment has fallen for 10 consecutive quarters. Industrial production has declined over the past year. But consumer price inflation is still in double digits, providing all the essential elements of stagflation (rising prices with slowing income growth).

At the moment the external sector is the weakest link. Exports are limping along but imports have ballooned (including all kinds of non-essential imports like gold), so both trade and current account deficits are at historically high levels. They are largely financed by volatile short-term capital. This has already started leaving the country: since June more than $12bn has been withdrawn by portfolio investors alone.

This situation is the result of internal and external imbalances that have been building up for years. The Indian economic boom was based on a debt-driven consumption and investment spree that mainly relied on short-term capital inflows. This generated asset booms in areas such as construction and real estate, rather than in traded goods. And it created a sense of financial euphoria that led to massive over-extension of credit to both companies and households, to compound the problem.

Sadly, this boom was also "wasted" in that it did not lead to significant improvements in the lives of the majority, as public expenditure on basic infrastructure, as well as nutrition, health, sanitation and education did not rise adequately.

We should know by now that such a debt-driven bubble is an unsustainable process that must end in tears, but those who pointed this out were derided as killjoys with no understanding of India's potential. Something similar is occurring in a number of other Asian economies that are also feeling the pain at present, such as Indonesia – while the Brazilian economy shows some similar features. The current Indian problems may be extreme, but they reflect what should now be a familiar process in all major regions of the world.....

Anonymous said...

This weakness of INR is no surprise. It was already an overvalued currency as per the big mac Index. India was artificially propping up the rupee to support the import lobby which is funded by foreign entities who wish to dump their goods into India.

I think Rupee movement to Rs. 200 per dollar is a good thing for India, because people will start using public transport and oil conservation will begin. Also indian domestic manufacturers will be able to compete with china on price. Also IT/ITES will bring more earnings and will become more competitive.

Indian will stop buying 2-3 smartphones every year and they will stop running behind non essential imports.

Gold will become costly and consumption will go down if it is elastic.

Why is a weak rupee so bad for an economy?

Riaz Haq said...

Anon: "Why is a weak rupee so bad for an economy?"

Currency stability is important for businesses and investors. Rapid fall scares them away which reduces economic growth and job creation. Jobs are important in a developing country like India with its vast population of the poor.

Weakening currency also fuels inflation of essential goods and services by pushing up cost of energy which India must import.

Anonymous said...

I think the fair value of the Indian rupee is around 70.

This is good because this massive imports of non essentials will stop.

Indian exports surged 12% last month and exporter order books are increasing.

In addition import of a lot of other goods from cellphones to power plants will become non competetive vis a vis domestic supply.All in all a good thing...

Hopewins said...

^^Anon: "This weakness of INR is no surprise. It was already an overvalued currency as per the big mac Index...."

Here are the facts....

Riaz Haq said...

HWJ: "Here are the facts.... "

Big Mac index has no meaning for a vegetarian country like India where meat consumption and prices are very low.

Riaz Haq said...

Onion index may be more appropriate for India rather than Big Mac Index....Dawn excerpt:

In the past one week, Indian consumers in New Delhi paid 80 rupees per kg for onions as compared to the current rate of 60 Indian rupees.....In local markets, there is a difference in wholesale price as quoted by Waheed Ahmed at Rs27.50 to Rs32.50 per kg in wholesale vegetable market new Subzi Mandi while a leading vegetable dealer at Subzi Mandi quoted whole...He quoted the export price of $400-450 per tonne or Rs40-45 per kg. “We are actually missing a great opportunity to fully exploit the Indian market potential as rains have played havoc with our local onion crop quality in Balochistan,” he said. He added that export made to India cannot be termed as ‘good exportable quality’.

Carabeef (buffalo meat) regulated price in India is INR 160 while real beef (cow meat) regulated price in Pakistan is PKR 360.

Actuals can run higher...INR 260 in India and PKR 500 in Pakistan according to news reports below:

Hopewins said...

^^RH: "Carabeef (buffalo meat) regulated price in India is INR 160 while real beef (cow meat) regulated price in Pakistan is PKR 360.

Actuals can run higher...INR 260 in India and PKR 500 in Pakistan according to news reports below.."

Sounds about right. Given that trend 1 INR = 1.8 PKR....

...Carabeef is about the same price in India as beef is in our country.

This is what I have been telling you. That the notion of meat being "cheap" in veggie India is a myth.

Riaz Haq said...

HWJ: "This is what I have been telling you. That the notion of meat being "cheap" in veggie India is a myth."

Then how do you explain Big Mac being the cheapest in India in the graph from The Economist? Doesn't supply-demand equation matter for pricing?

Talking about meat prices, the price of beef in Pakistan is Rs. 360 per kilo, not Rs. 288 for parity with India even if you assume 1.8X currency ratio which is wrong. It's now closer to 1.6 than 1.8

Second, per capita consumption does matter when you use it as a yardstick for inflation and purchasing power of a local currency. Hence Big Mac index is not relevant for India.

Riaz Haq said...

I wonder how the Economist magazine came up with Big Mac price in India for its Big Mac Index?

It's not even on the menu there.

Here's an excerpt of a recent Reuters' story:

McDonalds entered India in 1996 without its signature hamburger, respecting local religious beliefs which mean many people avoid eating beef and pork. It has become India's largest fast food chain operator selling chicken and fish burgers along with vegetarian items like McAloo Tikki, which has a potato patty, and the McSpicy Paneer, filled with cottage cheese.

Here's a possible explanation from Forbes magazine:

While it may not be as beefy as the Big Macs in other countries, India‘s version of the Big Mac (known as the ‘Maharaja Mac’) is the cheapest by a long shot, according to The Economist’s Big Mac Index for January 2013, which makes the Indian rupee the most undervalued currency in the world.......The index is not intended to be a perfect measure of “ideal” exchange rates, but a simple and fun rule of thumb. In India for example, the Maharaja Mac is made of chicken, not beef, due to cultural factors. A difference in dining cultures also plays a part in the pricing of the Big Mac; in several emerging markets, eating at McDonald’s is seen as a pastime afforded only to the middle class, whereas in the US, McDonald’s is viewed as a cheap, “lower class” option.

Riaz Haq said...

Here's a story about India's obsession to overtake China:

India's rupee crisis has muted its obsession with overtaking China and with growth halving in recent years, international focus has been drawn to the development challenges in Asia's third biggest economy.

Amartya Sen, a Nobel laureate, is a professor of economics and philosophy at Harvard, and this week he wrote in The New York Times that since Indian independence in 1947, life expectancy at birth has more than doubled, to 66 years from 32, and per-capita income (adjusted for inflation) has grown fivefold. In recent decades, reforms pushed up the country’s once sluggish growth rate to around 8% per year, before it fell back over the last two years.

He however acknowledged China's superior capacity to deliver public services and said that almost one in every 5 males and one in every 3 females are illiterate while less than half the children can divide 20 by 5, even after four years of schooling.

China's public spending on health is at 2.7% of GDP (gross domestic product) while India's is at 1.2%.

Sen says the inadequacies in education and health require more democracy not less, rather than moving closer to China's authoritarian system.

Jagdish Bhagwati, the other well-known Indian emigrant economist who is professor of law and economics at Columbia University, is a bitter rival of Sen's and they are each 79 years old.

Bhagwati, is best known for his work on trade and has been critical of Amartya Sen's model of growth, which he says has actually hurt the poor in India by not really supporting the market reforms in 1991 and pushing for a Food Security Bill which would create inflation.

India has a notorious reputation for bureaucratic red tape and Prof Bhagwati has no confidence in the political system delivering a significant improvement in public services.

Last month, 23 children, aged between four and 12, died after eating a lunch of lentils, potatoes and rice cooked at the school in a poverty-stricken village.

Forensic tests showed the meal was contaminated with monocrotophos, a lethal pesticide banned in many countries.

The infrastructure deficit was highlighted last year when there were huge electricity blackouts, affecting 600m people.

Arvind Subramanian, an Indian national, who is based at the Peterson Institute for International Economics in Washington DC, wrote:

[In Lord Richard Attenborough’s movie Gandhi, an underling of the British Empire heatedly warns his supercilious boss that Mahatma Gandhi’s impending protest march to the sea poses a far greater threat than the Raj realizes: “Salt, sir, is a symbol.” This elicits the memorable sneering put-down from the boss (played by Sir John Gielgud): “Don’t patronize me, Charles.”]

Subramanian asked: is power, or rather the power sector, today’s salt - - emblematic of both the pessimistic outlook and promise of India?...

Anonymous said...

Indian abbatoirs have no intention of selling their beef locally, since they want to export and make money. They will sell it to local market only if the price is much higher. Beef is not cheap in India as you claim. Only the rich of the rich can afford it. What the locals eat are typically meat of other animals and not beef.

On the other hand rice and wheat is cheap in veggie india because the govt is mandated to keep it cheap. PDS rice is available at Rs. 1 a kilo. This is because export is regulated by govt.

I think that grains in india are much cheaper than meat especially beef as compared to pakistan.

Anonymous said...

TCS is now world no 2 IT Services company by market cap!

Looks like all is not lost...

Riaz Haq said...

Here's a Dawn Op Ed by Sakib Sherani on Pak economy and rupee valuation:

Unlike the dramatic falling-out-of-the-sky of the Indian rupee, which has lost 18pc of its value against the dollar since January, the Pakistani rupee’s flirtation with, and eventual move beyond, the 100 to a dollar barrier almost seemed like an airliner’s gentle glide path on “long finals”. (This is also borne out by the fact that in 2008, the balance of payments crisis unfolded over a few short months, with monthly foreign exchange reserve depletion averaging, at $900m, nearly twice the level in the current episode.)

Even though many of us have been taught to think of the exchange rate as “just another price”, the decline beyond 100 still left a lot of people with a sinking feeling. For one school of thought, the exchange rate is a reflection of the overall health of the economy, and in Pakistan’s current circumstances of capital flight of every kind, especially from Karachi, the rationalisation that the rupee’s slide will be good for our balance of payments and longer-term investment prospects may be overly simplistic and a touch too optimistic.

It has taken the Pakistani rupee 66 years to get here. But, as most readers would be aware, the rupee has really been on a slippery slope since the 1990s. From an exchange rate of Rs21.85 to a US dollar on July 1, 1990, the rupee has lost nearly 80pc of its value. In comparison, the Indian rupee has lost roughly 60pc of its value, and the Bangladeshi taka approximately 51pc over the same period.

The bulk of the precipitous erosion in the rupee’s value has occurred since mid-2008, with the currency losing roughly 40pc. The severe pressure on the rupee in 2008 (and continually since then) occurred due to a number of factors. Briefly, these included:

• A strong overvaluation of the rupee, brought on by the Musharraf government’s policy of keeping the exchange rate stable over a long period of time;

• Imports rising faster than exports due to the nature of policies pursued in the 2003-7 period;

• The “super spike” in international oil and commodity prices since 2006-07;

• A sharp fall in foreign direct investment (FDI) from its peak;

• A steep reduction in net transfers from external sources;

• Persistent capital flight;

• A loss of export markets due to Pakistan’s internal security and energy situation.

Going forward, the fall in the rupee’s value can be arrested in the medium term by undertaking meaningful economic reforms which will improve our external competitiveness. A number of concomitant measures will be needed to stabilise the external payments position.

Reducing dependence on expensive energy imports by rationalising the fuel mix will be increasingly important in keeping pressure on the balance of payments in check. (It will also be a critical element in improving the competitiveness of Pakistan’s exports.) Agricultural productivity will play a crucial role as well, both in reducing the bloated food import bill and in generating exportable surpluses.

Anonymous said...

As many as 76 sitting MPs of various political parties face serious criminal charges and could be disqualified if convicted for over 2 years. BJP leads the list with 18 MPs while the Congress has 14 MPs with criminal record, Samajwadi Party with 8, BSP with 6, AIADMK with 4, JD(U) with 3 and CPI(M) with 2 are followed by 17 MPs from the smaller parties with serious criminal charges against them.