DEVALUATION OF PKR IN THE FIRST 6 MONTHS OF 2008

1. DEVALUATION OF PKRIN THE FIRST 6 MONTHS OF 2008 presented by Abdul HameedBaloch BM-25011

2. CURRENCY • Unit of exchange, facilitating the transfer of goods and/or services. • It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value. • Currencies are the dominant medium of exchange.

3. DEVALUATION • Reduction in the value of the currency with respect to other monetary units. • Official lowering of the value of a country’s currency within a fixed exchange rate system to set a new fixed rate with respect to a foreign reference country. • Depreciation: Unofficial decrease in the exchange rate in a floating exchange rate system.

4. FIXED EXCHANGE RATE SYSTEM • Currency’s value is matched to the value of another single or basket of other currencies, or to another measure of value, such as Gold. • Under a fixed exchange rate system, devaluation and revaluation are official changes in the value of a country's currency relative to other currencies. • Both devaluation and revaluation can be conducted by policymakers, usually motivated by market pressures. • The charter of the International Monetary Fund (IMF) directs policymakers to avoid "manipulating exchange rates...to gain an unfair competitive advantage over other members."

5. FLOATING EXCHANGE RATE SYSTEM • Market forces generate changes in the value of the currency. • Flexible type of exchange rate regime where currency’s value is allowed to fluctuate according to the forex market. • They allow dampening of shocks and foreign business cycles. • Managed float: A central bank will intervene to stabilize currency. For instance, it might allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor".

6. DEVALUATE: UNDER WHAT CIRCUMSTANCES? • Country devaluated because the interaction of market forces and policy decisions has made the currency’s fixed exchange rate untenable. • Inability to spend its foreign exchange reserves to purchase all offers of it’s currency at the established rate. • Devalue to make • Exports cheaper for foreigners • Imports expensive for domestic consumers This may help reduce Current Account Deficit. • Policy issues: Instead of unpopular fiscal spending policies, use devaluation to boost aggregate demand in the economy.

7. EFFECTS OF DEVALUATION • Increasing price of imports and stimulating greater demand for domestic products can lead to inflation. • Psychological: Viewed as sign of economic weakness. • Creditworthiness of a country may be jeopardized. • Successive rounds of devaluation. Trading partners may become concerned that devaluation might negatively affect their own export industries.

8. EXCHANGE RATE • The year 2008 has been termed disastrous for the rupee. • So far it has lost 23% of it’s value since December 2007. • Record low of Rs 81.4 against US$ 1. • In April 2008 Dollar was traded at Rs 64. • A few months back it was Rs 60.

10. Exchange rates: Pakistani rupee (PKR) per US$1 RATE YEAR/DATE • 84.00 (16/10/08) • 71.50 (26/07/08) • 63.50 (01/04/08) • 60.50 (01/11/07) • 60.75 (05/08/2007) • 58 (2004) • 57.752 (2003) • 59.7238 (2002) • 61.9272 (2001) • 53.6482 (2000) • 51.90 (1999) • 44.550 (1998) • 40.185 (1997) • 35.266 (1996) • 30.930 (1995)

11. FACTORS CAUSING DEVALUATION • Foreign Currency Reserves falling $800 to $900 per month. • Law and Order situation. • Flight out capital $70 million a day. • Gap between import and export bill. • Downgraded credit rating by International Rating Agency Standard & Poors and Moody’s. • Inflation rate more than 25%. • Widening Current Account Deficit. • Heavy Government borrowing to cover budget deficit.

12. BALANCE OF PAYMENT • BoP measures the payments that flow between any individual country and all other countries. • Determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. • Comprises • Current Account • Capital Account • Financial Account

13. BoP and PKR • Pakistan has a huge trade deficit, and our exports are very low. • The dollars we get as a result of exports is small compared to the dollars we have to pay for our imports. • We need dollars and cannot afford to let go of whatever little we get in the form of our export bills. • If the rupee appreciates in value against USD, that will increase our export bill for the buyer, and if that happens, we risk losing that client to a cheaper alternate, like China or India. • In order to 'retain' our exports, the state bank manipulates the exchange rate for rupee, to ensure that it doesn’t appreciate by too much against the dollar.

14. EXPORTS • Some of the items of its exports are oil seed, cotton, rice, wool, fish fresh, chilled frozen, tobacco etc. • Main export items are rice and Cotton. • Pakistan also faces severe competition in the world market like other developing countries. • Even with good harvest after good climate Pakistani goods can fetch good prices only if harvesting in competing nations was bad due to unfavorable weather. • Pakistan's exports stood at $17.011 billion in the financial year 2006-2007, up by 3.4 percent from last year's exports of $16.451 billion.

15. IMPORT • Main items of import are petroleum and petroleum products, vegetable oil and fats, team wheat, milk and cream etc. • Import of petroleum and petroleum products is very vital for the survival of the economy and have been on the rise in the international market. • Pakistan's imports stood at $30.54 billion in the financial year 2006-2007, up by 8.22 percent from last year's imports of $28.58 billion.

16. DEFICIT • Pakistan suffered a merchandise trade deficit of $13.528 billion for the financial year 2006-7. • In 2002-3 the deficit was only $1.06 billion. • The combined deficit in services and goods stand at $17.653 billion which is approx 83.5 percent of country's total export of $21.136 (Goods and services). • The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery and automobiles. • Current account deficit - Current account deficit for 2006-7 reached $7.016 billion up by 41 percent over previous year's $4.490 billion.

17. FOREIGN RESERVES • As of October 11, Pakistan's foreign currency reserves totaled $7.75 billion, having fallen $570 million in a week. • Critically, the central bank's share of this has fallen to $4.34 billion, while commercial banks held $3.41 billion. • As a result of deteriorating external balances and dwindling reserves the rupee fell almost 2.8 per cent in a day to a record low of 84.40, having lost 27 per cent since the start of 2008. • Losing $800 to $900 million per month.

18. LAW & ORDER SITUATION • Bomb explosions and Firing on citizens. • Gravely affecting social, political, economic and religious fabric of Pakistan. • Talented people are leaving the Land of the Pure for good because their fate is in the doldrums. • Thus menace of “Brain Drain” is continuously depriving the country of the intellectuals that are the true assets

19. Our tourism industry is in the doldrums due to security concerns. • In January and February 2008, a large number of people living abroad, including foreigners and Pakistanis, visited Pakistan; however, the number has decreased in March. • A large number of people from Pakistan went abroad during March. • Affecting areas like • Local business • Foreign investments • Sports • Entrepreneurship opportunities • Development projects • Civil life

20. SITUATION IN NORTH PAKISTAN • Only 14 foreign tourists visited the museum in May and June, two busiest tourist months. • Tourism has dropped 95%. • The Frontier province has lost $40 million in the past five years, almost $8million a year.

21. Prolonged political uncertainty, • Fragile economic situation, • Deteriorating law and order in the northern part of the country, and • The US threats of direct attacks in tribal areas Have not only shattered the confidence of foreign investors but also forced domestic investors to pull out of the equity markets. • Local Investors have lost billions of rupees with a single investor having reported 13 million alone.

22. DOMESTIC ISSUES • The World Economic Forum put Pakistan at number 91 out of 125 countries in the global race for competitiveness. • 48 ranks behind India (at No. 43) • Nine critical factors were highlighted.

23. Institutional Infrastructure. • Macro-Economy (86th) • Low levels of per capita income • High incidence of poverty • Unemployment • Illiteracy • Widening gap of trade accounts • Health and Primary Education (104th) • Almost 3 to 4 per cent of the federal budget is spent on the education sector. • Market Efficiency (54th) • Free-market mechanism, • Positive role of regulatory bodies, • Conducive macro-economic policies, • Meaningful incentives, • Trade liberalization, • Financial deregulation, • Corporate governance, and • Political commitment

24. Technological Readiness (89th) • Health and primary education (108th): The present government had sanctioned Rs450 million for PSDP in the current budget. • Poor Work Ethics • Business Sophistication • Innovation

25. GLOBAL ISSUES Global Financial Crunch • America saw two of its legendary firms bite the dust over the weekend. • Some foreign banks have been asked to cut down their exposure in Pakistan. • The market was short of dollars also because of the State Bank’s buy/swap operations.

26. Cont…. SUBPRIME • The subprime virus has truly gone global. • Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008. • It shook the strongest of economies forcing countries to intervene to save their economies.

27. Cont… Food Crises. • Our economic crisis is driven primarily by the global economic crisis. • Food crisis blessing in disguise for America. • For us the food crisis should be much less acute.

28. CONCLUSION