Sunday, December 1, 2013

Pakistan Rupee in Sharp Decline as Foreign Exchange Reserves Hit New Lows

Pakistani rupee has sharply declined to 109.50 rupees to a US dollar, a loss of nearly 10% of its value in just a few months since Mr. Nawaz Sharif was sworn in as Prime Minister in June, 2013. At the same time, the foreign exchange reserves have plunged to $3.463 billion, a 12-year low since November 2001 when country had foreign reserves of $3.5 billion.

The drop in rupee and foreign exchange reserves is happening in spite of the fact that remittances from overseas Pakistanis are setting new record highs and IMF bailout funds are also being disbursed.

Overseas Pakistanis Remittances:

Overseas Pakistanis have sent home over $55 billion since 2008-9. Last fiscal year alone, expatriates remitted about $14 billion. Additional $ 5.3 billion in remittances have flowed in the first four months (July-October) of the current fiscal year 2013-14, a increase of 6.27 percent over the same period last year.

Foreign Direct Investment:

Net foreign direct investment (FDI) has surged 13.3 percent to $424.9 million in the first four months (July- October) of the fiscal year 2013-14 versus $375.1 million received in the same period of last fiscal year, according to the State Bank of Pakistan as reported in the media.

IMF Bailout:

Pakistan has received $550 million from $6.6 billion bailout package agreed in September this year.

Tweet From Geoffrey Langlands,
 teacher of the ruling Lahore Elite at Aitchison
Policy Inaction:

Economist Sayem Ali was quoted as saying by Pakistani newspaper Express Tribune that sharp decline in foreign exchange reserves resulted from large oil import payments and external debt repayments. “Aggressive monetary tightening, higher import duties and cash margins on imports would have eased the pressure on foreign exchange reserves. However, the government has so far not shown any urgency to arrest the decline in reserves,” he said.

Another Lost Decade?

Economic mismanagement by Nawaz Sharif's economic team brings back memories of the lost decade of 1990s when economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s total public debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% and 264.8% respectively in 1998) and India (44.0% and 358.4% respectively in 1998).

After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class. Pakistan's savings rate  reached historic high of 17.6% of GDP in 2004 and remained above 15% during Musharraf years. It has now plummeted to a new low of just 4.36%.

Pakistan Savings Rate as Percentage of GDP Source: World Bank

The best one can hope for is that Nawaz Sharif and his finance minister Ishaq Dar have learned from their past mistakes and they will try and do better this time around.  I expect it'll be a lot tougher now because of other major issues such as terrorism and energy  which also require a lot more attention.

Here's a video discussion of Pakistan's economy and other current affairs, including Indian elections:

Pakistani Economy under Nawaz Sharif; PTI Dharna; Indian Elections from WBT TV on Vimeo.

Related Links:

Haq's Musings

Pakistan to Beg and Borrow Billions More in 2013-14

Power Companies Profits Soar at Taxpayer's Expense

Does Nawaz Sharif Have a Counter-terrorism Strategy?

Pakistan's Tax Evasion Fosters Aid Dependence

Pakistan's Vast Shale Oil and Gas Reserves

Pak IPPs Make Record Profits Amid Worst Ever Load Shedding 

Global Power Shift Since Industrial Revolution

Massive Growth in Electrical Connections in Pakistan

Finance Minister Ishaq Dar's Budget 2013-14 Speech


Mayraj said...

Maybe due to money spent on oil etc.

Tahir said...

As long as the present leaders are busy looting the meagre resources of the country, I do not see any improvement, all their attention is rivetted to amassing as much wealth as they can, they do not have time to do anything good for the country and its poor masses.

Your statistics show that Mussharaf was many times superior to all these polititions who are taking turns in looting whatever little is left. God only can help Pakistan by some how or the other getting rid of these corrupt and shameless looters of the countries' wealth and giving a chance to somebody like Imran to run the country.

Imran said...

Going down to the target price of 129 set by the government

True to the core of Pakistan's federal government inability to govern

Salim said...

So now gdp will shrink by 10% or more??

Riaz Haq said...

Salim: "So now gdp will shrink by 10% or more?? "

No, Pakistan economy has never shrunk in its entire history nor is it likely to.

It's still growing at about 3-4% which is very slow given the fact that it's still a developing country with rising population capable of increasing GDP at 6-7% annual rate.

Iqbal Singh said...

Haq Musings, June 28:

"Sharp fall in Indian currency against the US dollar and slower economic growth have caused India's GDP for Fiscal Year 2012-13 to shrink in US $ terms to $1.84 trillion from $1.87 trillion a year earlier. The Indian rupee has plummeted from 47.80 in 2012 to 54.30 to a US dollar in 2013, according to Business Standard. Since this report was published in Business Standard newspaper, Indian rupee has declined further against the US dollar to Rs. 59.52 today. At this exchange rate, India's GDP is down to $1.68 trillion, about $200 billion less than it was in Fiscal 2011-12. "

Now that PKR has plummeted by 10%, Salim has a point using your reasoning as in India's case.

Riaz Haq said...

Iqbal: "Now that PKR has plummeted by 10%, Salim has a point using your reasoning as in India's case."

Indian rupee was and is down a lot more than 10% and greater than the current inflation rate to compensate for drop in nominal GDP due to exchange rate.

Riaz Haq said...

Ansar Abbasi credits #PMLN 4 reduced corruption in TI survey conducted in #Pakistan before March 2013 under #PPP gov

Riaz Haq said...

Here's a Dawn report on Pakistan's rising prices:

ISLAMABAD: Pakistan's annual inflation rate rose to 10.90 per cent in November from 9.08 per cent in October, the Pakistan Bureau of Statistics said on Monday.

On a month-on-month basis, prices rose 1.27 per cent in November. For October, the monthly pace was 1.97 per cent.

The average annual inflation rate for July through November was 8.84 per cent.

HopeWins Junior said...

^^RH: "Here's a Dawn report on Pakistan's rising prices..."

Forget about rising prices, have you SEEN the latest reports on the TOTAL COLLAPSE of our savings rate?

It is now down to a PATHETIC 4.3%!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gds_totl_zs&scale_y=lin&ind_y=false&rdim=region&idim=country:PAK:BGD&ifdim=region&hl=en_US&dl=en_US&ind=false

Riaz Haq said...

Here's an ET report on Ishaq Dar begging US to release CSF funds to Pakistan:

With its foreign currency reserves hitting the dangerously low level of $3 billion, Pakistan has requested the United States to expedite the process of releasing about $900 million on account of services that Islamabad has rendered in global fight against terrorism.
The request to disburse dues on account of the Coalition Support Fund (CSF) was made by Finance Minister Ishaq Dar on Thursday during a meeting with Washington’s Ambassador to Islamabad Richard Olson. He urged the US to release the outstanding dues in order to avoid the looming threat of default on international payments.
“Early reimbursements of dues on account of Coalition Support Fund… will help Pakistan in improving its present foreign exchange reserves position,” Dar was quoted as saying in an official handout, issued by the Ministry of Finance.
But while the urgency to secure the release of CSF dues builds up on one hand, Dar’s request could not come at a more inopportune moment.

As the minister implored the US envoy to fast track the release of the fund behind the closed doors of Q Block, the workers, office bearers and parliamentarians of Pakistan Tehreek-e-Insaf were staging protests barely a few hundred yards away, outside the Parliament House, demanding the government stop the passage of Nato supplies through the country in retaliation to continuous drone strikes in the tribal areas.
The US Ambassador, meanwhile, remained non-committal about the timing of the release. An official handout stated that Olson assured the Finance Minister that he would convey Pakistan’s position to the US government.
According to the State Bank of Pakistan, the country’s foreign reserves have plunged to $3.05 billion as of November 29 – a sum sufficient to back an import bill of just three weeks. The reserves held by commercial banks stood at $5.19 billion, said the SBP. The outflows were not matching with the inflows due to heavy repayments to the IMF and other international lenders, and delays in taking certain policy decisions which the World Bank and the Asian Development Bank have demanded be implemented before release of loans.
The IMF has so far given only $547 million while another tranche of roughly the same amount is expected to be approved by the lender’s executive board before the end of this month.
For the current financial year, Pakistan has budgeted $1.2 billion on account of CSF. However, the US has so far disbursed only $322 million. Around $900 million remain outstanding. Pakistan hopes to receive at least $300 million more in coming weeks.
It is not yet clear whether the Obama Administration has notified the Congress about releasing another tranche to Pakistan on account of CSF. The administration is required to give a 15-day notification before it can release the amount. Christmas and New Year holidays in the US will start from December 23, which may adversely affect Pakistan’s bid for early disbursements.

Hopewins said...

^^RH: "Another lost decade?"

Lost decade? Unless we have another military coup, I fear that this "democracy" of ours will lead to a LOST GENERATION.

Sharif may be marginally better than Zardari, but I doubt he is capable of tackling the serious macroeconomic and political problems we face today. Only an unelected (non-populist) military government (dictatorship) can have the strength needed to do that.

Pakistan's future now lies in the hands of the Army.

Do you disagree? Do you think democracy will work for Pakistan?

Anonymous said...

Dictatorship may is better in short term, but democrazy can only ensure lasting peace. The problem is that in dictatorship one person has to ASSUME what is good for the people. Moreover there would be no checks and balances in a dictatorship. I am impressed by what imran khan had to say in a press meet yesterday. Simple solutions do exist for complicated problems. Just that you need to look at the problem without the unwanted baggage of ego, outcomes, etc.

Riaz Haq said...

Anon: "Dictatorship may is better in short term, but democrazy can only ensure lasting peace."

Democracies wage wars just as often as dictatorship....sometimes more often.

There are no examples in Asia of democracy bringing prosperity. To the contrary, all Asian Tigers became prosperous under dictators before becoming democracies.

The contrast between India and China offers a stark difference between the results delivered by one-party dictatorship in Chima and multi-party democracy in India.

Hopewins said...

Jim Rogers: "And yet, in 1947, when it achieved independence, India was one of the more successful countries in the world, a democratic country."

IF this is true of India, THEN it is also true of Pakistan.

Would you describe the Pakistan of 1947 as "one of the more successful countries in the world"?

You can see 1950-Present position of India, Pakistan & China here as a movie....

Just check the China, India and Pakistan boxes on the right to see their positions in 1950 and then play the movie to see how these three countries have evolved since then.

ALSO Note NIGERIA & KENYA in that graph from 1950 to current.

Anonymous said...

Riaz Haq. your view that in asia only dictatorship will work is totally flawed. Your example of china is not correct. As i have said it is a short term phenomenon. It is just like the japan of 1990 or the other asian tigers who were fuelled by US growth. Dictators can run factories. They cant rule societies nor can they support a civilisation. You are correct to the extent that dictator ship may work for pakistan at this moment, because terrorist dont understand democrazy, but understand that you are underestimating the power of democrazy at your own peril.

PS: Have you lived under dictatorships. You cant be selfish and live in US and condemn all of us who live in asia into dictatorships.

Riaz Haq said...

Anon:" As i have said it is a short term phenomenon."

Th experience of Asian Tigers shows that 20 or 30 year long "short-term" is good enough to lift the vast majority of people out of poverty and pave the way for responsive democracy with good governance.

It's certainly preferable to the continued high levels of poverty and huger that people in Indian "democracy" are suffering for the last 66 years.

A billion people were lifted from abject poverty between 1980 and 2010. China accounts for nearly three quarters of these, or 680 million people brought out of misery, by reducing its extreme-poverty rate from 84% in 1980 to 10% now, according to a report in The Economist. The report adds that with "poorer governance in India and Africa, the next two targets, means that China’s experience is unlikely to be swiftly replicated there".

As China's share of the world's extreme poor (living below $1.25 per day per person level) has dramatically declined, India's share has significantly increased. India now contributes 33% (up from 22 % in 1981). While the extreme poor in Sub-Saharan Africa represented only 11 percent of the world’s total in 1981, they now account for 34% of the world’s extreme poor, and China comes next contributing 13 percent (down from 43 percent in 1981), according to the World Bank report titled State of the Poor.

Anonymous said...

Mr.Haq, China today suffers from air pollution, contaminated food etc. Please wait for another 2 years till they suffer from water pollution and soil pollution. What benefit is is it to give contaminated food or unclean air to rich guy (who apparetly will die of pollution rather than hunger). Dictatorships can provide only that. They cannot provide a sustainable ecosystem for long term growth. It is better to live in healthy atmosphere with half stomach. You just discount the eastern philosophy's power of fasting. Your view of poor and rich is very western which is purely in terms of dollars.But unfortunately it is not so. Did you know aurangazeb found happiness in being a poor hatseller rather than a rich emperor. A caged parrot fed on rich food is as poor as a parrot which is free but has to hunt for a small fruit. What is your view. Do you thing a guatanamo bay detainee is poor or rich. He get fed well but is imprisoned. Freedom is the soul of democrazy.

Riaz Haq said...

Anon: "China today suffers from air pollution, contaminated food etc."

Most major industrialized nations have experienced this during their rapid industrialization phases.

London had a serious coal pollution problems and most of its buildings were covered with black soot. Los Angeles' air brought tears to people's eyes. But it all got fixed up as moved to control pollution.

US FDA was set up only about 100 years in America's 250 year history.

A Yale study last year found India's air to be the most toxic in the world.

The world's worst industrial accidents like Bhopal have occurred in India.

Anon: "Dictatorships can provide only that. They cannot provide a sustainable ecosystem for long term growth."

There's plenty of evidence to the contrary. Just look at Singapore, Malaysia, Taiwan and South Korea all of which eradicated poverty and hunger, and brought education and prosperity to their people under dictators.

Anon: "Freedom is the soul of democrazy."

The most basic freedom is freedom from hunger and illiteracy.

Riaz Haq said...

Here's Finance Minister Ishaq Dar claiming 5% GDP growth in first quarter of FY 2013-14, according to Pakistan Today:

The financially beleaguered Pakistan Muslim League-Nawaz (PML-N) has claimed that the country has recorded at least five per cent growth in Gross Domestic Product (GDP) during the first quarter of this financial year and 17 per cent jump in revenue collection during July to November showing the “positive outcomes of the economic policies of the government”. During a press conference on Wednesday, Finance Minister Ishaq Dar said that the present government had successfully made a revenue collection of Rs 792 billion during the past five months against Rs 679 billion recorded in the same period last year – an increase of at least 17 percent. Besides, the fiscal deficit, which was recorded at Rs 690 billion during the period under the previous government, has been reduced to Rs 570 billion with the reduction of 2.2 percent. Remittances have also shown a growth of 7 percent during past five months making the figure to $6.4 billion against previously recorded $ 5.9 billion during the same period. Talking about foreign reserves which have depleted to over $3 billion, enough for only one month’s imports, the minister said that it was not a cause of concern for the government as it was expecting it. “The government has already stepped up efforts to jack up the reserves position to a reasonable level. We have policies and roadmap to bring the foreign exchange reserves to at least $20 billion in the next three years,” he said. Explaining how the depleted reserves figure would be pushed to the claimed level, Dar said that his government will receive $800 million from Etisalat by the end of the current month, with another $790 million from the Coalition Support Fund from US by January 15, 2014. Besides, at least $1.5 to 2 billion would be received against the auction of spectrum licence which is expected to be held in February 2014. Further, the government has received $137 million from the Islamic Development Bank. He said that inflation in the country was mainly because of the few bold steps taken by this government to resolve longstanding issues like circular debt. Through this move the government has saved at least Rs 70 billion in terms of interest. He criticised the caretaker government that despite changes made in 18th amendment of constitution, it had not cleared the accounts for the new government. Dar said that the devaluation of rupee was mainly because of speculation and government has taken steps to discourage speculators which was evident from the fact that the inter-bank rate on Wednesday was closed at Rs107 to a dollar. He hoped that the figure would further come down. According to him, the situation of inflows will further improve and those who speculate on Pakistani currency would end up as losers. The government, encouraged by positive outlook projected by “Standard and Poor” ‘Moodys’, planned to float a global rupee bond with the assistance of IFC who are also interested in floating of sovereign bonds of Pakistan which has received a very positive response from the market.

Anonymous said...

Riaz Haq said...

Here's Daily Times on ADB's $3.2 billion loan to Pakistan in next 2 years:

The Asian Development Bank (ADB) on Tuesday announced restoration of Budgetary Support for Pakistan from March 2014 along with Three Years Business Plan for the country under which it would disburse $3.2 billion from 2014-16.
ADB’s Country Director to Pakistan Dr Warner E Liepach made this announcement while addressing a press conference on Tuesday. The Bank announced its three years Business Plan for Pakistan under which it would disburse $3.2 billion from 2014-16. Of which about one-third will be for budget support while two-thirds for project lending. ADB has disbursed about $470 million in the current calendar year. Liepach further said that the Bank would disburse $2 billion to Pakistan during the current fiscal year.
He said that economy is on track and the financial support for Pakistan has been scaled up. He said ADB supports the government reforms and vision 2025 and disbursement would be in recognition of its economic reforms. He said that currently about 25 projects for the country are in pipeline, which included those related to infrastructure, irrigation and energy. More than 20 projects are being funded by the Bank.
Replying to a question, Liepach said that Diamer Bhasha Dam is still under consideration, however the Bank could not provide more than $1.5 billion for the project, which are linked with financial support and reforms. He further said that study report of the project would be completed in the next eight months. The ABD official said that there are operational and technical, governance and financial issues, including circular debt. The root cause of the circular debt needs to address while the cost should be brought down, he said, adding that the government has introduced some reforms; however these have been challenged in the Supreme Court.
Regarding subsides by the government; the ADB country director said that they should be targeted. “The economy is kept up in the first quarter due to good power supply. There has been agreement with IMF for the privatisation of some units and the agreement should be honoured,” he stated. Liepach said that privatisation should be done with a formal planning. ADB, he said, has approved a loan of $167.2 million for eight distribution companies in Pakistan to improve the power distribution system and to help provide reliable, regular electricity to businesses and domestic consumers.
The Bank has also approved $900 million loan for a new supercritical coal power generation unit in Pakistan that will deliver reliable, cost-effective electricity to hundreds of thousands of energy-starved households and businesses. The ADB has approved a $430 million equivalent loan to expand and strengthen national social safety net programme Benazir Income Support Programme (BISP), which is helping lift millions of families out of poverty, said Liepach.

Riaz Haq said...

Here's Bloomberg News on IMF asking Pakistan to actively increase foreign currency reserves:

Pakistan’s central bank must “actively” work to increase foreign exchange reserves, including adjusting interest rates, the top International Monetary Fund official to the country said.
“Pakistan needs to tap inflows including remittances, export revenue and capital transfers,” Pakistan mission head Jeffrey Franks said in a phone interview from Washington yesterday. Financial support from other international organizations likely to arrive in the next six to nine months will be “a positive,” he said.
The IMF approved a $6.6 billion loan in September to help Prime Minister Nawaz Sharif’s government stabilize the economy, which has suffered from a Taliban insurgency and power shortages. While Pakistan’s performance in the first review was mostly satisfactory, the IMF said foreign exchange reserves fell to a “critically low” level.
Sharif has changed energy policies to tackle power shortages and plans to raise as much as $1 billion in a bond issue abroad to raise funds. Currency reserves held by the State Bank of Pakistan have fallen about 60 percent to $3.7 billion on Jan. 2 from a year earlier, central bank data show.
The central bank has raised the benchmark interest rate by 100 basis points since the loan’s approval to 10 percent. The IMF faulted authorities for failing to prioritize rebuilding reserves in the review released on Jan. 3 and said they will remain tight for the next two or three quarters.
“The SBP must unhesitatingly use every policy tool at its disposal to boost reserves, including adjusting the policy rate, intervening to purchase reserves on the spot market, and allowing greater flexibility of the exchange rate,” it said.
Pakistan’s rupee fell 7.7 percent against the dollar last year, among the worst performers in Asia, according to data compiled by Bloomberg.
An earlier, partially disbursed $11.3 billion IMF program expired in September 2011 after Pakistan failed to meet the conditions attached to it.

Riaz Haq said...

Here's WSJ on State Bank Governor Yaseen Anawar resignation:

The head of Pakistan's central bank, Yaseen Anwar, resigned Thursday, the government said, on the eve of a review of the country's performance by the International Monetary Fund.

"He has resigned for personal reasons," said Shafqat Jalil, a Finance Ministry spokesman. He didn't give any further explanation, and Mr. Anwar didn't return calls seeking comment.

Mr. Jalil said an acting governor would be appointed Friday.

Mr. Anwar had been governor of the State Bank of Pakistan since October 2011. His resignation comes as the economy faces soaring inflation and a sharply weaker currency.

Foreign-exchange reserves are critically low. The country missed its target for foreign-currency reserves at the previous IMF quarterly review and was given a waiver on the issue.

The IMF agreed to a $6.7 billion bailout in September, but has released only roughly $1.1 billion of the three-year loan.

Officials from the central bank are to meet IMF representatives starting Saturday in Dubai, to begin the second quarterly review, a process that would involve the head of the central bank in the coming days.

The IMF's quarterly reviews are designed to ensure the country meets its bailout conditions.If the IMF finds Pakistan is failing to meet its bailout targets, future tranches could be in jeopardy, which would put the economy further at risk.

"The timing of this resignation is unprecedented, just before the second review," said a retired senior official. "It affects the credibility of the whole process."

A focus of the review will be Pakistan's net foreign-exchange reserves. The volatility of the rupee has been a source of tension between the central bank and the government, analysts said.

Mr. Anwar was widely criticized for his handling of the foreign-currency markets, an issue on which Finance Minister Ishaq Dar has personally intervened.

Mr. Anwar, a former investment banker, was appointed by the previous government, of the Pakistan Peoples Party.

The current administration, led by Prime Minister Nawaz Sharif took office in June.

In recent years, heads of the State Bank have come under pressure to increase lending to successive governments, to finance their budgets, an issue that may have contributed to the departure of previous recent central bankers.

"The Ministry of Finance does whatever it likes and the State Bank is expected to accommodate," said Zubair Khan, a former finance minister. Mr. Khan said Pakistan urgently required the IMF to increase the rate of disbursal of its loan.

, saying the current program was based on "unjustified optimism."

Pakistan is struggling with economic and security challenges. While Mr. Sharif's administration is considered business-friendly, analysts say its economic plans require an improvement in the security situation.
Farrukh Khan, head of research of KASB, a brokerage based in Karachi, said that inflation was now steadying, while other indicators were also more positive.

"The ship is turning around. It will take some time," said Mr. Khan. "There are definite signs of improvement."

The IMF, after its first quarterly review, found Pakistan's performance "mostly satisfactory." It is forecasting GDP growth of 2.8% for the current financial year. However, the IMF had also found that "the balance of payments outlook has worsened and firm action is required to address critically low foreign-exchange reserves."