Help Needed - Protest against Rupee Dollar peg

I should add that the article is a little dated...2 years. The point of the article is even stronger today than it was two years ago since the US$ has fallen substantially since then, making the difference between the Rupee and other major currencies even greater than it was when that article was written in 2005.

Not everything is a debate you must win zeemax....the peg to the dollar is not the crude official peg of Saudi Arabia, but a more unofficial peg.

Please read this article from Pakistan Business Times...its is not a panicked statement...it (devaluation) is a real problem issue for Pakistan and has been eroding away at us for decades.

"The monetary managers and foreign exchange regulators must remove the unofficial loose peg that the Rupee is maintaining to the US Dollar."

HOW STRONG IS THE PAKISTANI RUPEE?

The Pakistani Rupee has been relatively stable over the past few years. Gone are the days when the currency was on a continuous depreciation path caused by speculative hording. In this new era of growth and stability, trade balances, foreign inflows and current accounts determine the exchange rates. In the current financial year the propulsion in commercial and economic activity within Pakistan is somewhat blurring the situation of the rupee. When analysed over a two year period, the Pakistani Rupee has depreciated by about 5% against the US Dollar. Keeping in mind that the country is on track for a record $5 billion trade deficit in the 2004-5 financial year, the monetary managers have done well in preventing the local currency from a large slide.

Is that the real scenario? Has Pakistan averted a major slide in the value of its currency?

Most countries of the world compare their currencies to the US Dollar when determining its value. Pakistan is no different. The US unit is used by Pakistan to quote trade figures, foreign exchange reserves, and foreign debt stock. In the midst of the current economic boom, Pakistan’s imports are expanding rapidly. The country is faced with a $2.5 billion trade deficit for the first six months of the fiscal year. Foreign Exchange reserves of the country have been hovering in the $12 billion range. The general perception is that the Rupee is holding up quiet well. In this article we examine how the Pakistani Rupee has done over the past few years, differentiating perception from reality, and looking at its real value with respect to major currencies of the world.

It is true that the Pakistani Currency has depreciated by about 5% against the US Dollar over the past two years, but how has it done when compared to the other major currencies of the world such as the Euro, Pound Sterling, Yen and Swiss Franc. Lets analyse the rupee individually against each of these major currencies. Euro: In January 2003 the Euro was being quoted at Rs 61. Presently it is trading at about Rs 77, which means that the Pakistani Rupee has lost 26% value against the Euro. Pound Sterling: At the start of 2003 the Pound was available for Rs 93, whereas it’s present value is in the Rs 111 range. The local currency has depreciated by about 20% against the British unit. Yen: The rupee is 21% weaker against the yen today then it was two years ago. Swiss Franc: In January 2003 the Swiss Franc was available in the Rs 42 range, whereas today it is being priced at Rs 49, a 19% slide in the value of the local currency against the Swiss Currency.

The above comparison demonstrates that the Pakistani Rupee is not as strong as it is generally believed and it has certainly lost ground when compared to the major currencies of the world. No action or interest has been witnessed from the financial managers or the central bank on this issue.

Cause of the slide in value and the disparity

Unofficially and unintentionally the Pakistani Rupee is being marked to the US Dollar. That is, the value of the US currency (in terms of currencies such as Euro, Pound Sterling, Yen, etc) is being used by the markets in Pakistan to determine the value of those currencies in Rupees. The correlation of this can be witnessed when the present value of the dollar is compared to what it was two years ago. The US dollar has slid 22% against the Euro, 18% against the British Pound, 13% against the Japanese Yen and 15% against the Swiss Franc. Therefore the rupee is weakening against the other major world currencies due to the fact that the US dollar is loosing value against those currencies. In an unconventional way the currency market in Pakistan is maintaining a loose peg to the US currency. Due to this tendency the value of the rupee (against the dollar) only changes as a result of fundamental factors such as trade imbalance, current accounts and demand supply factors, whereas its value against other currencies is based on the value of the US dollar to those other currencies.

The US dollar has been sliding against the European currencies over the last few years primarily due to a large imbalance in the trade figures. The United States has been continuously recording large trade deficits over the last many years. The positive factor for the United States has been that most of the dollars that go outside the country in purchasing imports is invested back to purchase dollar denominated US treasury bills and bonds. Financial experts still see a further slide in the value of the US unit. If such an occurrence does take place, it could have serious consequences for Pakistan.

The Rupee and the domestic economy

Pakistan is in the midst of a great economic boom. Robust expansion in the domestic sector, on the back of record private sector credit off-take, has made it possible for Pakistan to surpass the growth target of 7 percent. The few negative factors as a fall out of the exemplary growth performance are the increase in the trade deficit and the rising inflation. The easy availability of credit and the expanding domestic economy has created greater demands for imported goods. As Pakistan is a technology deficient country it will be dependent on other countries for technology transfer, hi-tech equipment and advancement, due to which its import bill cannot be expected to come down any time soon. As a result the Pakistan Rupee is likely to remain under pressure due to the trade imbalance. Therefore it is vital that exchange rates and foreign exchange is managed so as to prevent any negative consequences to the economy and the national (government) accounts.

With the current foreign exchange environment in Pakistan, the country could face abrupt changes in economic fundamentals if the US Dollar looses substantial value. The Rupee would loose value, together with the US unit, making our imports such as petroleum products, machinery, capital goods, etc, more expensive, increasing the inflationary pressure in the economy and derailing the growth momentum.

Time for a change

Gradually the world is changing from one reserve currency to two. The Euro has emerged as the competitor to the US Dollar. It is common knowledge that an increasing amount of international trade is being done using the European Currency, even among the non Euro zone countries and that more and more countries are increasing their share of Euros in their foreign exchange reserve holdings. What must Pakistan do to protect its interest in this changing environment?

The monetary managers and foreign exchange regulators must remove the unofficial loose peg that the Rupee is maintaining to the US Dollar. Its exchange rates with other currencies should not be set on the basis of the US Dollar. Exchange rates of other currencies should be determined independently between the two currencies or, even better, determined on the basis of a basket of currencies. A mechanism such as this would be a better way to depict the real change in the value of the domestic currency.

The only way to maintain long term stability on the exchange front is to remove the trade imbalance that the country is suffering. Pakistan must raise its exports and export earnings, and bring down the level of foreign debt. Even though the economic managers of the country are well aware of this, results are conspicuous by their absence.
nw@pbt.com.pk

Zyxius,

Good news. Rupee is NOT pegged to the dollar. The peg was removed in June 1998.

Also, if the USD keeps falling, Pak Rupee should appreciate and not depreciate.

Just some well-meaning corrections to your panicked statements ....

This article is one example....the market is already expecting Saudi Arabia and the OPEC countries to dump the Dollar very soon. The axe is about to drop.

http://www.arabnews.com/?page=6&section=0&article=103775&d= 20&m=11&y=2007&pix=business.jpg&category=Business

Saudi Riyal Touches 21-Year High
Reuters


DUBAI, 20 November 2007 — Gulf currencies rallied yesterday after United Arab Emirates policymakers called for a regionwide review of dollar-pegged exchange rates.

The Saudi Arabian riyal hit a new 21-year high on the first international trading day since a source familiar with Saudi currency policy told Reuters that the world’s largest oil exporter could consider revaluing its dollar-pegged currency.

Investors in forward markets bet the riyal and UAE dirham would appreciate 1.43 percent and 3 percent respectively in a year’s time, expecting that Gulf Arab oil producers will unshackle their currencies from the tumbling dollar as Kuwait did in May. Kuwait’s dinar has appreciated 4.69 percent against the dollar since it started tracking a currency basket on May 20, blaming the greenback’s slide for driving up the cost of imports.

UAE Central Bank Gov. Sultan Nasser Al-Suweidi said last week he too could start tracking a currency basket including the euro, but would only act along with Saudi Arabia and three other oil producers preparing for monetary union as early as 2010.

The UAE is under mounting social and economic pressure to drop the peg, Suweidi said on Thursday in an interview that drove the dirham to a five-year high.

Political and business leaders in the UAE, the second-largest Arab economy, are discussing possible changes to the dollar-peg policy, said Omar ibn Sulaiman, governor of the Dubai International Financial Center. The UAE, the world’s sixth largest oil exporter, is under the greatest pressure to review foreign-exchange policy.

Any change should be agreed with other Gulf states, he said. Saudi Arabia could revalue the riyal but will not drop the dollar peg to track a currency basket, the source said on Friday, communicating the Saudi response to market expectations of a Gulf exchange-rate shift.

Saudi officials including the central bank governor and finance minister have repeatedly ruled out changing the riyal’s exchange rate, which was fixed at 3.75 to the dollar in 1986.

Bids on the riyal were as strong as 3.7050 at 0750 GMT, their highest since the riyal’s rate was set in June 1986. At 0830 GMT, bids on riyal forward rates were for an appreciation of 1.3 percent to 3.70 per dollar in a year. Bids had hit as strong as 3.6965, a 1.43 percent rise, earlier. Bids on one-year forwards for the United Arab Emirates dirham were pricing in a rise of more than 3 percent to 3.5615 per dollar at 0840 GMT. The dirham spot rate is fixed at 3.6725 by the central bank.