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Rupee devaluation pushes up Pak foreign debt

By Tariq Butt
ISLAMABAD. Oct 18: The 8.71 per cent devaluation of the Pakistani rupee against the U.S. dollar has taken country's foreign debt to over 42 billion US dollars.
The devaluation announcement by the Central Bank came just days before the meeting of the executive board of the International Monetary Fund (IMF) to consider the 1.6 billion US dollars - Extended Structural Adjustment Facility (ESAF) on October 20.
The IMF had reportedly asked the Pakistan government to devalue the rupee during talks with Pakistani officials In Hong Kong a few days ago.
In the pre-devaluatfon period. if a foreign Investor earned Rs 41. it meant he gained one dollar; but now he wllThave to earn a little over Rs 44 to equal one dollar, an industrialist said.
Instead of being dictated by the IMF. the government should have given priority to privatisation of state-run entities since devaluation will affect both the common man and the
government, said A H Ahmed, former chairman, Pakistan Electrical Goods Manufacturers and Importer Association.
Finance Minister Sartaj Aziz however said the sixth adjustment of the rupee since April last, following the six paise re-adjustment on July 11, would neither increase the foreign debt burden nor adversely affect foreign investment.
The finance minister said the interests of the common man have been looked into while devaluing the currency and several safeguards have been ensured against the adverse consequences.
The Impact of depreciation has not been passed on to items like kerosene, high speed diesel, light diesel and furnace oil. and as a result there has been no increase in bus fares, transport charges, or tractor hire charges. Stable prices of furnace oil will ensure more stable electricity prices.
With a tough set of conditions. the IMF has urged the government to meet certain targets for the first quarter of the
current fiscal 1997-98. The failure of the tax collectors to generate sufficient revenues has compelled the finance ministry to re-think its policy.
The unloading of surplus flovernment staff is another MF condition which the government wants to fulfill before October 20.
Officials said the Stgte Bank of Pakistan (SBP) was spurred by the Pakistani rupee's appreciation against the regional currencies which was causing a decline in the exports.
There was mounting pressure from exporters on the plea that exports weren't picking up because of inflation differential between Pakistan and other countries. especially Europe whose currencies had been long adjusted downwards against the dollar, adversely affecting Pakistani exports, particularly textiles.
These exporters have been arguing that the value of Pakistani rupee has gone up by 13 to 16 per cent against European currencies.
However, apart from the ex-
Sorters' demand, what may also ave clinched the argument finally was the IMF's insistence on a re-adjustment as part of the economic reforms agreed with Pakistan, which could pave the way for ESAF agreement. That at least appears to be the perception of the stock market, where the Karachi Stock Exchange Index rose in anticipation of that agreement now being a virtual certainty by 44.50 points to 1958.05
The devaluation has been done on pressure from the cotton and textile sector but other sectors have been ignored, said Farooqi. Chairman. Korangi Association of Trade and Industry. Apart from affecting the general public, the devaluation would also make the government suffer as its debt servicing and Pakistan's import bin would automatically increase, he said.
The exporters plea was being resisted by the SBP for two reasons. One. the share of exports to Europe in the total of 8 billion US dollars annually was only 1 billion US dollar. Two,
the Pakistani rupee was still considered cheaper by some 12 per cent on the world markets when compared to Pakistan's major competitors such as India and China, whqse similar exports particularly textiles had been eroding Pakistan's world market share.
The central bank may also have been relying on the experience of last year's 12 per cent devaluation, which failed to boost exports but produced the inevitable consequent pressures of devaluation as a double-edged weapon, on debt servicing and the balance of trade, because of costlier imports.
Exports from Pakistan to European markets have fallen by 10 per cent, to Japanese market by 20 per cent and to South East Asian markets by 55 per cent due to non-competitive exchange rates.
Another factor behind devaluation was the high rate of inflation in Pakistan as compared to other trading partners The rate of inflation in Pak istan during the last 12 months
had remained over 12 per cent as compared to 2.2 per cent in Korea, 1.86 per cent in Japan. 1.42 per cent in the United States. 1.24 per cent in Germany and -0.77 per cent in China.
The currency crisis in South East Asia might be another relevant factor for lowering of rupee parity, an analyst says.
Hanif Janoo, President, Karachi Chamber of Commerce and Industry, says Pakistan's economy is importbased and as a result of devaluation. its import bill would automatically increase and the cost of all raw materials would also go up.
The devaluation might result in some short-term benefit but there seems no long-term benefits. It has been done at such a time when the government was planning, in consultation with the private sector, to revive the sick units. It might create impediments in the revival of sick units affecting the Industrial growth.
Source: India Abroad News Service