Article: Impact of recent devaluation on the economy.

(Pakistani economy)
Article from: Economic Review Article date: September 1, 1996Author: Ali, Muhammad Imtiaz

In the existing scenario of the forces of demand and supply, the rupee is expected to continue its
downward trend. If the counter measures through cost-cutting and efficiency management are
not taken to check the inflation, which is already running in double digit, the advantages of
devaluation will be offset as in the past, leaving adverse impacts as our economy.

The State Bank of Pakistan has recently devalued the rupee by 3.65% in relation to the US
dollar. It was the seventh (7th) value adjustment since the beginning of the current financial year.

Besides attracting exports to over comes the serious crisis of foreign exchange reserve, and to
improve current account deficit to stabilize balance of payment position. The other factor which
might have forced the central bank to resort to one-go devaluation i.e. 3.65 per cent instead o
creeping one, could be then existing considerable gap of around Rs.5/- per US dollar ($) between
the Kerb market rate and official rate of dollar in Pakistan.

It is the forces of demand and supply that determine the international price of a currency. In over
case the principal forces of demand of the rupee include exports, foreign remittances,
investments, short and long term loans, which create demand for the currency.

Article: Pakistani rupee hits record low

Economics 10/7/2008 12:26:00 PM

Rana Bhagwandas, 21 March 2007.

ISLAMABAD, Oct 7 (KUNA) -- Pakistani rupee Tuesday hit record low against US dollar,
showing a devaluation of more than 24 percent since beginning of this year, further deepening
the economic crisis as S and P downgraded Pakistan further into junk territory.

According to the Interbank market rate, on Tuesday the rupee slumped to 78.80 to the US dollar
-- a fall of more than 24 percent since the beginning of 2008. Since the new democratically-
elected civilian government has come into power, Pakistan is going through turbulent political,
economic and security period.

Ratings' Agency Standard and Poor's (S and P) cut Pakistan's sovereign rating further into junk
territory on Monday, saying the country's worsening external liquidity may imperil its ability to
meet about USD three billion in upcoming debt obligations.

The agency noted Pakistan would require external assistance in meeting its debt obligations, but
expressed concern about whether the help would be enough or whether it would come in time.

The agency underlined mounting concerns over Pakistan's balance of payments situation amid
global financial crises.

While business confidence has also been severely hit by growing instability, the country's central
bank reserves have fallen to USD 4.68 billion, or equivalent to just over two months of imports.

Along with the worsening rupee-dollar parity, foreign investment is virtually becoming
nonexistent.

President Asif Ali Zardari has requested the international community to infuse USD 100 billion
in grant into Pakistan's economy to ensure its survival.

Inflationary trends in Pakistani economy

News & Articles Add comments Apr 30

2008.By Aftab Ahmad Khan

Source: Federal Bureau of Statistics

Courtesy: The News, 28/4/2008

Inflation, which is a phenomenon with momentous economic, social and political consequences,
may be broadly defined as a sustained increase in the general price level. It may, however, be
noted that all prices need not rise together. Relative prices may increase at varying levels, but in
the process push up the general price level. Cyclical swings in prices cannot be termed as
inflationary e.g. wheat shortfalls in one season may cause its price to rise but the next year
normal production could adjust its price to equilibrium level. The causes of inflation have been
much discussed in economic literature and policy debates. There is, however, little disagreement
that in the long run inflation is primarily a monetary phenomenon. High rates of price increase
cannot be sustained for extended periods without corresponding increase in money supply. The
link between monetary growth and inflation is empirically well established for high inflation
countries but adjustment lags and shifts in money demand functions tend to weaken the short run
correlation in countries with more moderate rates of inflation.

Monetization of the fiscal deficits is frequently the major source of excessive monetary
expansion in developing countries. Developing countries resort to monetary financing of fiscal
deficits to a greater extent than industrial countries. This is because of the structural weaknesses
of public sector financing in developing countries, which are typically characterised, as in our
case, by narrow tax bases, low elasticity of public revenue as well as under-developed capital
markets and low private savings. Although a sustained rise in inflation is only possible, if it is
accommodated by inappropriate fiscal and monetary policies, episodes of high inflation can be
triggered by other developments such as large depreciation of exchange rates, adverse supply
shocks, rise in import prices, excess of wage claims over productivity growth, and monopolistic/
oligopolistic market structures.

Structural reforms may also create temporary inflationary pressures, for example when prices are
being de-controlled and subsidies cut.

Many economists have frequently emphasized that inflation is more than an economic problem.
This is because of their belief that money supply in a modern economy is a “sociologically
determined variable.” Behind the excessive money supply, lie complex socio-political forces
struggling over the distribution of income and wealth. Various groups, strata and classes in
contemporary economies are engaged in an organized struggle over distributive shares. This
distributional struggle is not new but it has acquired certain new dimensions, which compel the
state to continuously increase the supply of money.
In a free polity particularly, a large number of groups and sections of people pressurize the
elected government to accommodate their demands. These groups include organized labor,
industrialists, traders, defense personnel, civil servants, farmers etc. These groups do not
explicitly ask for inflation, but it is their demands, which if fulfilled usually lead to it. These
implicit demands for inflation arise from pressures on the government not to pursues an anti-
inflationary policy; these may stem from taxpayers who demand lower taxes or exemptions or
who resist extension of the tax base; or these many emanate from beneficiaries who resist
expenditure reduction or imposition of appropriate charges or these could be ignited by groups
attempting to obtain an increase in their share of national income. Thus, in the short-run,
acceleration in money supply and prices represent politically rational response to the various
pressures exercised by the beneficiaries of inflation or by those who are going to suffer as a
consequence of dis-inflationary measures. It is, however, also a fact that politically motivated
inflation if persisted in for a considerable period could assume serious proportions with
unwelcome political consequence.

Pakistan has been grappling which inflationary pressures of varying intensity during its entire
life of over 60 years as an independent country. According to official statistics, consumer price
index (CPI) increased forty fold during the period 1949/50 – 2006/7. The pace of inflation has,
however, been varying at different periods of history. Inflationary pressures in the economy
during the 1950s and 1960s, were quite moderate; the average annual price increase during the
1950, was 3.0 per cent, while it was 3.2 per cent during the 1960s. During the decade of the
1970s there was worrisome acceleration in inflation attributable to heavy devaluation of the
rupee, sharp-rise in oil prices and large monetary expansion (average annual increase of 21 per
cent as against average annual growth of 4.8 per cent in Gross Domestic Product). There was
deceleration of inflationary pressures during the 1980s with higher real domestic growth of 6.5
per cent on an average basis and a marked reduction in the annual average growth of monetary
assets to 13.2 per cent. During the decade of the 1990s, inflationary trends witnessed acceleration
with an annual average growth of 9.7 per cent in consumer price index (CPI); monetary assets
also witnessed a sharp average annual rise of 21.7 per cent in this decade as against an annual
average increase of 4.6 per cent in GDP. There was a welcome decline in inflation rate to 3.6 per
cent in 1999-2000. During 2000-2001 to 2003-04, the average annual rate of rise in consumer
price index was a modest 3.9 per cent. This impressive performance on the inflationary front was
quite remarkable especially in view of the fact that monetary assets expanded at an annual
average rate of 15.5 per cent during this period. The low level of inflation during 1999-2000 to
2003-04 can be attributed to improved supply position stemming from output recovery, strict
monetary measures leading to lower monetisation of fiscal deficits, depressed international
market prices and appreciation of the exchange rate.
Price inflation indicators for FYs 2004-05, 2005-06 an 2006-07 were somewhat disturbing.
Inflation as measured by CPI increased by 9.3 per cent in 2004-05, 7.9 per cent in 2005-06 and
7.8 per cent in 2006-07; monetary assets during these fiscal years increased at an annual average
rate of 17.9 per cent. During the first nine months of the current FY08, the average CPI based
inflation has been estimated at 9.5 per cent period compared to 8 per cent in the same period last
year. Food inflation, however, jumped to 13.8 per cent as compared with 10.3 per cent in the
corresponding period last year. The wholesale price index (WPI) and sensitive price index (SPI)
during July-March FY08 registered increases of 12.59 per cent and 12.87 respectively.

Inflationary trends in recent years have remained uncomfortably high on account of domestic
supply side disturbances and the impact of increase in international prices of oil and some key
food items. To control inflation, the State Bank of Pakistan has been pursuing a tight monetary
policy during the last three years. It has raised its discount rate to 10.5 per cent. It quite
appropriately emphasised in its 2Q Report for FY08, the importance of controlling growing
macro-economic imbalances reflected in the widening fiscal and current account deficits which
add to inflationary pressures.

The costs of inflation to the economy have been considerable. Inflation has tended to accentuate
inequalities and caused strains on our balance of payments. It pushed a sizeable chunk of our
resources into socially wasteful channels such as real estate, luxury housing, speculative
inventories, bullion and jewellery and foreign exchange balances abroad. Inflation has been
responsible for enlivening speculation, stimulating inessential consumption and often generating
a climate of industrial strife and instability in the country. Discrimination against the public
services is an endemic feature of inflation without indexation. Our public administration has
consequently been deeply demoralised and eroded. This is reflected in its inability to enforce
laws including those which relate to taxation and other public revenues as well in failure to
maintain and improve basic social services like education, health, transport, electricity, water and
drainage. In view of these massive economic and social costs,, there is no more important
economic agenda item than to beat down the established inflation. In the absence of firm and
decisive measures to curb inflation, the expected benefits to the economy from government
policies of promoting growth, reducing poverty, enhancing employment opportunities and
liberalisation would not accrue. Money represents a claim on a share of society’s output.
Stabilising the price level protects that claim while inflation reduces it. It would be inefficient to
allow the length of a yardstick to vary over time. Similarly it is inefficient to change the
yardstick of economic value.