• Under-privileged groups, lower-middle class most susceptible to inflationary pressures
• One rupee rise in dollar price increases foreign debt by around Rs1bn each time
• Manufacturers complain each hike decreases their products’ competitiveness in global market

WITH the dollar rising to uncharted heights, stakeholders warn that a weakening rupee could open up Pakistanis to a second round of inflationary impact, which will hit the lower and middle classes the hardest.

On Tuesday, the US currency further appreciated by Rs1.56 to reach Rs195.74, closing in on the psychological barrier of Rs200.

Experts believe that while no sector of the economy would be immune to the fallout from the rupee’s steep devaluation, key areas such as debt servicing and imports for industry and food items will be among the first to be affected.

Topline Securities CEO Mohammad Sohail told Dawn that the common man is always indirectly affected by the fall of the rupee.

“A weaker rupee means costlier imports that increase inflation, which affect the lower and lower-middle class more than the upper-middle class or the very rich,” he said.

Samiullah Tariq, head of research at Pak-Kuwait Develo­pment and Investment Company, said that when the rupee depreciates, the prices of nearly all products go up, which increases inflation and cost of living for common people.

He said that the increase in commodity prices was not only increasing the dollar value of imports, but due to depreciation, rupee prices have also increased further. “The prices of products are linked with exchange rate parity,” he said.

Korangi Association of Trade and Industry President Salman Aslam warned that political instability was aggravating the economic crisis to dangerous levels. He was of the opinion that establishing ties with friendly countries on the basis of bilateral trade, not aid, was the need of the hour.

President, Employers’ Federation of Pakistan Ismail Suttur was of the opinion that the country was heading towards a national crisis.

Due to recent events such as the Russia-Ukraine war, commodity prices have sky rocketed globally, which has led to the diversion of large amounts of foreign exchange towards the energy import bill, which has doubled to $17 billion during 10MFY22 from $8.7bn last year.

He urged the government to impose an immediate ban on the import of non-essential luxury items, or impose heavy duties. He also called for a ban on leisure travel for at least 18 months as well as the need to introduce a comprehensive electric automobile policy.

Debt servicing

The debt servicing burden has gone up by Rs3,700 billion due to the 19 per cent devaluation of rupee during the current fiscal year.

Experts say that every time the dollar goes up by a rupee, the country’s debt rises by around Rs1 billion; the total foreign debt is estimated to be around $130.6 billion.

“During the current fiscal, foreign debt servicing increased by Rs.3.7 trillion in terms of rupees,” said a senior banker, adding that the country finally has to pay off the debt in dollars, not rupees.

It is worth noting that the reserves of the State Bank of Pakistan have also fallen to $10.3bn from $20bn in August 2021.

The Economic Affairs Division (EAD) recently reported that Pakistan’s total foreign repayments stood at over $12.3 billion during the current fiscal year FY22, including principal and interest repayments.

The current account deficit has also crossed $13bn during the last 9 months which may reach at $15 to $16bn. In this situation, foreign currency reserves have also gone down by nearly half during the fiscal FY22, creating a full-fledged balance of payment crisis for the economy.

Industrial woes

In addition, an appreciated dollar raises costs of production, which will have an adverse impact on the competitiveness of the country’s products in the international market.

“Pakistan is a trading economy and we roughly import 75pc of our energy needs. The country also imports major raw materials to produce finished foods. Currency depreciation will only lead towards higher energy costs and higher costs of industrial production, which will have a direct inflationary impact on the overall economy,” said Tahir Abbas, head of research at Arif Habib Limited.

Exporter Javed Bilwani, who is also chairman of the Pakistan Apparel Forum, told Dawn the situation is critical for the economy, since most exporters produce their goods nearly 50pc imported materials.

“The appreciation of the dollar increases the cost of production, making our products less competitive, while foreign buyers are constantly demanding lower prices,” he said.

Automotive

In view of the prevailing economic uncertainty, the Indus Motor Company (IMC) has again suspended advance booking of all vehicles from May 18, 2022 until further notice.

Apologising to their consumers, IMC said deliveries for already-booked vehicles would continue as per delivery schedule. However, other assemblers are yet to follow the suit.

IMC and Lucky Motor Corporation (LMC) had earlier suspended the advance booking of vehicles in the first week of April 2022 due to similar concerns, but the process resumed after a 10 to 15-day break.

CEO Lucky Motor Corporation Limited (LMCL) Asif Rizvi said assemblers had not factored in the dollar crossing Rs195 in calculating the cost of vehicles, add that it would be difficult for the industry to sustain its prices for long.”

In his words, rupee depreciation not only hit the landed cost of completely and semi-knocked down kits being imported by assemblers, but also raw materials and components that are imported by local vendors.

Rizvi said the increase in vehicles prices would severely affect car sales in future. Car sales numbers had been showing impressive growth, but “new bookings are facing a sharp decline after the huge hike in interest rates and rising vehicle prices.

He also predicted that auto financing may reach zero in the coming months, adding that the impact of all these factors would be more visible on vehicles sales in 2023.

Construction and steel

Association of Builders and Developers (ABAD) Chairman Mohsin Sheikhani said the massive fall in the value of the rupee has sent prices of construction materials soaring to an alarming level, hiking up the construction cost of an apartment to Rs 5,500-6,000 per sq ft from Rs 3,000 some three years ago.

“How can builders work on new projects when steel bars cost Rs215,000-220,000 per tonne and cement is at Rs 850-900 per 50kg bag?” He added that construction on old projects in Punjab and Karachi was continuing while new projects were being shelved.

Sheikhani said that in this environment, the number of people willing to buy flats and properties had also seen a massive decline.

He also criticised the government for not having a roadmap for the future. “How will it deal with the ballooning trade deficit, rupee depreciation and falling reserves, which are causing anxiety among local investors and stakeholders,” the ABAD chief asked.

Syed Wajid Bukhari, general secretary of the Pakistan Association of Large Steel Producers, told Dawn that steel bar prices were likely to go up further if the rupee kept falling. This will not only increase the landed cost of steel scrap, but also cause cause a surge in fuel, power, gas, coal and transportation costs, which was out of the control of the steel bar industry.

He said federal taxes, which are about 30pc now, would also go up with the increase in basic prices.

Published in Dawn, May 18th, 2022