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Can depreciating rupee generate enough exports to counter growing debt and liabilities?

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News Analysis |

The depreciation of the rupee is a double-edged sword. Under IMF pressure, Pakistan authorities decided to depreciate the rupee, which has directly affected the country’s external debt and liabilities. With rupee-dollar exchange rate trying to achieve its equilibrium, the foreign debt has surged to $85 billion according to data released by the state bank of Pakistan on December 15th, 2017.

With experts predicting the rupee to fall further, it will push the accumulated debt figure even high. The statistics released were based on the exchange rate of Rs. 105.4, which was the case on September 30th, 2017. But, the rupee has further deteriorated and now it is hovering around Rs. 110.34 in today’s trading. It means that on the current rate, it would have further pushed the total debt and liability higher.

Can the depreciating rupee generate enough exports to counter the growing debt and liabilities? No one knows, but history says Pakistan has more to lose than gain.

The total debt and liabilities as a percentage of GDP have increased to 71.9% by September 2017. Surprisingly, it is decreased by -2.61% as it was 73.8% in September 2016.  But, this position can quickly change because experts believe that the value of the rupee should be around Rs. 120. 

The central bank released a statement on December 8th, 2017, and stated, “the exchange rate will continue to reflect the demand and supply conditions; and SBP stands ready to intervene, in case speculative and/or momentary pressures emerge, for the smooth functioning of the foreign exchange markets.” Will it allow the rupee to fall further? If it will, what is the threshold level where SBP may decide to intervene remains ambiguous.

Read more: State Bank of Pakistan performing despite obstructions

Despite this decline, Pakistan’s debt burden is enormous and unless remedial measures are not used, it could escalate the problem further.

SBP said, “Continuation of high growth in imports led to a widening of the current account deficit and consequently to depletion in the country’s foreign exchange reserves.” Besides, “these pressures have persisted, leading to the adjustment in the interbank exchange rate.”

Due to widespread corruption and underutilization of loans on asset building, it may not be able to improve the financial perils for Pakistan.

It is understandable that the country had to let go of its policy because, in a situation where, reserves were depleting quickly, and despite the improvement in exports in recent months, imports have remained consistently high. Resultantly, SBP has to give in and other than depreciating, there was no other way around it.

Will exports show the jump is ambiguous, but, the hike in debt is known, and it will only take an upward trajectory until exchange rate is allowed to move under the demand and supply conditions and the market clears out, and equilibrium is achieved. 

Pakistan’s cost of debt servicing has increased due to increase in both principal and interest payments. The total long-term debt servicing has been $4.454 billion in FY17 as compared to $3.076 billion in FY2016, which is the increase of 44.78%.  The surge in interest payment in the same period was 20.375% as it surged from $1.345 in FY16 to $1.620 billion in FY17.

Read more: Does the growth in FDI depict the true picture of Pakistan’s…

Despite this decline, Pakistan’s debt burden is enormous and unless remedial measures are not used, it could escalate the problem further.

Pakistan’s failure to drive growth and development with borrowed funds internally and externally has failed to improve the conditions of the country and its masses. Because, failure to implement structural reforms, and lack of competitiveness, energy crises, and continuous political instability augmented the problems.

Depreciating the rupee may not be able to generate enough revenue via exports to pay off the bulging twin deficit and increasing debt and liabilities. Pakistan may not be in a position to have enough resources, which could be allocated for infrastructure and inclusive development. Moreover, due to widespread corruption and underutilization of loans on asset building, it may not be able to improve the financial perils for Pakistan.

Read more: Why Pakistan’s finance minister is misleading country on debt figures

Can the depreciating rupee generate enough exports to counter the growing debt and liabilities? No one knows, but history says Pakistan has more to lose than gain.


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