Rupee: The journey to down south

While watching a TV program a few years back, the, the then governor SBP replied to a question about Rs.5000 note the host argued that higher denomination is a gauge of weaker currency. Governor rejected the argument and said a 5k note is merely $100 and one can buy a tie out of it. This was the time when minimum wage was less then Rs.5k. back and dollar/rupee parity was Rs.57. in dollar term minimum wage was $87. Today minimum wage is 6000 rupee but in dollar term it worth only $72. Minimum wage in the country increased in rupee term (from 2004 to date) by 20% but in dollar term decrease by 17%. Rupee is weakening because our C/A deficit and high inflation.

Lately both these indicators are showing improvement, apparently but the fact is that both are still pushing rupee weaker. Purchasing Power Parity is one way of evaluating currency value. It compares inflation in two countries, no doubt in Pakistan inflation is sliding but our trading partner runs even lower inflation and by theory this support weakening of Rupee. Beside lower commodity prices must have brought our C/A deficit lower but global financial markets are in a draught like situation makes it even worse, it was easier a few years back to get finance for a huge deficit, back then we went for Euro bond, privatization besides capital market receipts and funding for war on terror was supportive.

All these points are very well known to many market participants, but the point that we don’t talk much about is that, lately we compare price of any commodity in dollars or at least pitch that the commodity has gone expensive internationally and thus it is expensive in the country. Just keep the various cartel cases a side, this setup is feeding in the anxiety to general public as there income is shirking and prices are rising. When this course will change is any once guess because there is no effort is visible in reversing it. This will probably make poor segment of the society even more vulnerable.

This will make SBP job even more difficult, the institution is responsible for price stability in the country. When your currency is losing value how can you achieve price stability? SBP officials will give all kind of reasons to suggest otherwise, during an MPS, I had inquired, how core inflation will slide down, when the 24 months housing basket will keep it higher? The question was referred to economic advisor and he provided reasons why it will (fine so far) but in the next meeting the basket was one of the reasons keeping core inflation high.

Roots of our current situation go back to the era when Zia regime, the policy persuade thereafter are same in fact experts who device policies are same or at least took their turn one after another just like our politicians. You don’t agree…………. No……………. just take a look around.