Weak rupee signals trouble for Pakistan

May 10th, 2008 Sana · No Comments

Source: Chron

KARACHI, Pakistan — Pakistan’s currency edged toward an all-time low against the U.S. dollar Thursday amid anxiety about the new government’s ability to contain inflation as well as budget and trade deficits swollen by rising oil prices.

Since late February, the rupee has fallen about 8 percent against the dollar, which was trading at 67.15 rupees Thursday in Karachi. That’s close to its lowest ebb of about 68 to the dollar back in 1998, in the wake of Pakistan’s first nuclear test.

A five-week-old coalition of parties who routed allies of President Pervez Musharraf in February elections has taken over the government just as serious economic problems have begun to emerge.

Demand for dollars is soaring along with the price of Pakistan’s oil imports. Pakistan sells rupees and buys dollars in order to pay for imported oil. Crude oil rose above US$120 per barrel for the first time earlier this week.

Meanwhile, inflows of investment and remittances from Pakistanis working overseas have failed to keep up, limiting the demand for rupees.

“It is basically dollar demand pressure and the declining inflow (of dollars) which is weakening the rupee,” said Nabeel Iqbal, a senior official at Khanani and Kalia, a Karachi-based currency trading firm.

Malik Boston, former president of the Pakistan Foreign Exchange Dealers Association, said exporters were delaying their purchasing of rupees in expectation that it will continue to fall _ exacerbating the shortage of dollars on the currency market.

The ruling coalition government, led by the party of assassinated ex-Prime Minister Benazir Bhutto, has blamed the previous administration for disguising and failing to tackle the problems in time.

The cash-strapped government has slashed costly fuel subsidies, leading to a hike in the price of gasoline and heating oil for ordinary Pakistanis. Food price inflation is also running well into double digits.

The government is currently preparing a budget that is expected to include unpopular cuts in government spending and efforts to raise more taxes to contain a deficit expect to reach at least 6 percent this year.

In March, the World Bank warned that Pakistan risked an economic “crisis” unless the government took stern action.

Pakistan has enjoyed strong economic growth and a relatively stable currency since Musharraf seized power in a 1999 coup and made Pakistan a key U.S. counterterrorism ally two years later.

Boosted by U.S. aid and booming service sectors, the economy has bounded ahead for the last seven years and is still growing at more than 6 percent a year.

But growth appears to be slowing as the country battles inflation. Foreign investment has also slowed markedly, further reducing the demand for rupees.

Its trade deficit ballooned to a record US$14.5 billion in the nine months through March, while its foreign exchange reserves have dropped by about one-quarter since October to about US$12.6 billion.

Lower reserves undermines confidence in the future stability of the rupee and limits the Pakistani central bank’s ability to support it in the markets by selling dollars.