Falling Rupee: Winners and Losers
Over the past three and a half years, the local currency has depreciated by around 31% against the US dollar to settle at 175.86 rupees in the interbank market on Friday, February 18.
Experts believe that this devaluation has considerably increased inflation in addition to bringing the country’s debt to an unsustainable level.
The Express Tribune examines the impact of the depreciation on several sectors.
Ahmad Jawad, head of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), lamented that despite a current account surplus and strong remittances to the country last year, “the Pakistani rupee has not experienced any significant correction”.
Doesn’t the government realize what the country has suffered over the past 3.5 years as a result of a 31% devaluation of the currency, he asked.
“Foreign exchange reserves, held by the State Bank of Pakistan (SBP), stand at around $17 billion,” he said, adding that $2 billion was on the way from international lenders, which would be reflected in the data within two to three months.
Yet the exchange rate continues to hover at 175 against the dollar, he lamented.
“It shows that we are being forced to depreciate the local currency by international donors and it is a program against Pakistan to weaken the economy,” Jawad said.
Prime Minister Imran Khan should understand that the appreciation of the rupee was absolutely necessary for the economic recovery of the country.
If the local currency fails to gain ground, the country will remain in the grip of skyrocketing inflation and soaring commodity prices ranging from automobiles to food items.
Talking about the automotive sector, he pointed out that the local industry took advantage of the depreciation of the rupee and revised car prices upwards by around 70% despite the fact that the assembly plants were located in Pakistan and that only a few parts had to be imported. .
Moreover, the prices of essential drugs have also increased, he noted.
Citing a study, which analyzed the price trends of 120 randomly selected drugs, Jawad observed that a major jump was seen in 2019 as the sample average price jumped to Rs585 from Rs410 in 2018.
He recalled that the Drugs Regulatory Authority of Pakistan (DRAP) had allowed a 15% rise in drug prices in 2018 due to the sharp devaluation of the rupee.
Rates of active pharmaceutical ingredients of common medicines, imported from China, have soared due to the depreciation of the rupee, Jawad pointed out.
In August 2018, the local currency stood at 123 rupees per dollar, which had been devalued to 178 rupees in January 2022, he recalled, adding that the country had experienced one of the steepest depreciations in the 3.5 year period of history.
“The only other strong local currency devaluation occurred when Dhaka (Bangladesh) was separated from Pakistan,” he said. “At that time, the local currency depreciated by 58% from Rs 4.6 per dollar to Rs 11.1.”
He reiterated that the recent fall in the local currency was “dictated by the International Monetary Fund (IMF) and has nothing to do with macroeconomic fundamentals.”
Detailing the performance of regional currencies, he pointed out that the Indian rupee stood at 70.09 rupees against the US dollar in 2018 and now stands at 75.39 rupees.
The Bangladeshi taka has fluctuated between 84 and 85.9 to the dollar (on average) over the past two years and it currently stands at 85.76 against the greenback.
Insight Securities analyst Ali Asif believed that the manufacturing sector bore the brunt of the Rupee’s depreciation.
The fall in the value of the local currency increased the cost of production, which ultimately resulted in an additional price burden for end consumers, he added.
“We have noticed a persistent increase in car prices due to the depreciation of the rupee, as most of the raw materials, especially cold rolled coil (CRC) for flat steel, are imported.”
On the other hand, the fall in the value of the rupee has greatly helped textile exporters to post better profit margins, he pointed out.
“Although the sector imports some of the raw material, the devaluation of the rupee has given it full support,” he added.
Echoing his views, Arif Habib Limited (AHL) analyst Arsalan Hanif said that the devaluation of the rupiah against the greenback mainly facilitated the textile sector.
“This gives textile exporters a competitive advantage over other countries, in terms of price, labor charges and profit margins,” he said, adding that the sector was experiencing double-digit growth. export figures.
On the other hand, the automotive sector was the most affected by the fall in the value of the rupee, because “the industry imports most of its parts from abroad”, he pointed out.
As a result, car prices in Pakistan have increased by more than 50% over the past three years, he added.
“The automotive sector can easily pass the impact of expensive raw materials onto end consumers due to the strong pricing power of automakers,” he said. “It has happened before.”
Speaking of the textile industry, Topline Securities analyst Saad Ziker noted that the diversion of foreign orders to Pakistan from Bangladesh and India amid the Covid-19 pandemic has also played a role. key role in the rise of textile exports in addition to the devaluation of the local currency.
Textile exports reached $9.4 billion in the first half of 2021-2022, he said, adding that the depreciation of the rupee coupled with rising cotton prices had helped the sector reach that level.
“The textile sector is the biggest beneficiary of the devaluation of the rupee,” he noted.
Referring to the pharmaceutical industry, he mentioned that companies have been urging the government to increase drug prices as the majority of active pharmaceutical ingredients are imported by companies.
Citing examples, he said that recently the cost of the raw material used in paracetamol (drug) has risen leading DRAP to approve a hike of around 40% in its price from Rs1.9 to Rs2.7 per tablet.
Insight Securities analyst Saad Hanif pointed out that the fall in the value of the rupee has significantly increased the cost of production for the industries, as “they mainly import coal for their operations and that accounts for around 40-45% their cost of goods sold.
A senior cement industry analyst, Saqib Hussain, opined that the devaluation of the rupee had increased the cost of manufacturing by 100 rupees per bag (cement) over the past three years.
Published in The Express Tribune, February 20and2022.
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