BY M. UZAIR YOUNU
The US dollar has been on a tear since the Nov 8 presidential elections in the US. The Turkish lira has been the worst hit, losing over10percentagainstthegreenbacksince the elections. The Mexican peso, Brazilian real, Malaysian ringgit, and the Indian rupee are among a whole host of currencies that have also lost value during this period.
The Pakistani rupee has also depreciated with the exchange rate of the dollar crossing Rs109 in recent days, causing dollar shortages in the open market.
On Nov 30, Opec members agreed to reduce output by 1.2 million barrels a day in the first production cuts by Opec in over eight years. Non-OPEC members joined in on Dec 10, with Russia leading the way in cutting 300,000 barrels out of a total 528,000 barrels a day cut. Oil prices have sharply rebounded and crossed the $56 a barrel mark following these agreements. Following the 1.8m barrels a day cut, experts have updated their priceforecasts and now expect the price of oil to hover closer to the $70 a barrel in 2017.
Higher oil prices will increase Pakistan`s import bill and increased petroleum prices will intensify inflationary pressures. The rupee, which is already under pressure, will face further depreciation in the market as Pakistan reckons with both a resurgent dollar and rising import bill. Under such a scenario the State Bank would have to dip into itsforeigncurrencyreserves to stabilise the rupee and pay for oil imports.
The current government has allowed an appreciation in the real exchange rate of the rupee -the IMF has raised this issue in numerous reports about the state of the economy. An unintended consequence of this policy has been deterioration in export competitiveness as other emerging economies have allowed their currencies to depreciate in the international market. The depreciation of therupee could restore some competitiveness to Pakistan`s exports. However, this positive impact would not be as extensive due to the fact that Pakistan`s exports suffer from a general lack of competitiveness and that other currencies have and are depreciating.
Recovering finances in the Gulf could raiseremittance inflows into Pakistan. These in flows have been st agnant in re cent months as economic activity in oil-exporting economies of the Gulf has slowed down. The rebound, however, could take months as countries such as Saudi Arabia rebuild their balance sheets after years of low oil prices.
In the coming years Pakistan will also face rising external financing needs these cannot be met by the current inflow of dollars from exports and remittances.
According to IMF data, the country will require over $13bn a year from 2017 to 2020. This estimate does not take into account the depletion of foreign currency reserves that could occur under the scenario highlighted above. Given this reality, one can expect that Pakistan will struggle to meet its external financing needs and could find itself bacl(in the arms of the IMF.
As Sal(ib Sherani articulated in his Dec 9 article titled `Post-IMF or pre-IMF?`, Pakistan`s economy is `enjoying the sun in a brief interlude between two Fund programmes`.
With the government entering the tail-end of its term in 2017, the gathering storm could not come at a more inopportune time.
The writer is a South Asia analyst at Albright Stonebridge Group in Washington DC.