DEVALUATION OF

PKR
IN THE FIRST 6
MONTHS OF 2008
presented by

Muhammad Irfan MBA

 CURRENCY
 Unit of exchange, facilitating the transfer of
goods and/or services.

 It is one form of money, where money is

anything that serves as a medium of
exchange, a store of value, and a standard
of value.

 Currencies are the dominant medium of

exchange.
 DEVALUATION
 Reduction in the value of the currency with
respect to other monetary units.

 Official lowering of the value of a country’s

currency within a fixed exchange rate
system to set a new fixed rate with
respect to a foreign reference country.

 Depreciation: Unofficial decrease in the

exchange rate in a floating exchange rate
system.
 FIXED EXCHANGE RATE
SYSTEM
 Currency’s value is matched to the value of another
single or basket of other currencies, or to another
measure of value, such as Gold.

 Under a fixed exchange rate system, devaluation

and revaluation are official changes in the value of a
country's currency relative to other currencies.

 Both devaluation and revaluation can be conducted

by policymakers, usually motivated by market
pressures.

 The charter of the International Monetary Fund (IMF)

directs policymakers to avoid "manipulating
exchange rates...to gain an unfair competitive
advantage over other members."
 FLOATING EXCHANGE RATE
SYSTEM
 Market forces generate changes in the value of
the currency.

 Flexible type of exchange rate regime where

currency’s value is allowed to fluctuate according
to the forex market.

 They allow dampening of shocks and foreign

business cycles.

 Managed float: A central bank will intervene to

stabilize currency. For instance, it might allow a
currency price to float freely between an upper
and lower bound, a price "ceiling" and "floor".
 DEVALUATE: UNDER WHAT
CIRCUMSTANCES?
 Country devaluated because the interaction of market forces
and policy decisions has made the currency’s fixed exchange
rate untenable.

 Inability to spend its foreign exchange reserves to purchase all

offers of it’s currency at the established rate.

 Devalue to make
 Exports cheaper for foreigners
 Imports expensive for domestic consumers
This may help reduce Current Account Deficit.

 Policy issues: Instead of unpopular fiscal spending policies, use

devaluation to boost aggregate demand in the economy.
 EFFECTS OF
DEVALUATION
 Increasing price of imports and stimulating greater
demand for domestic products can lead to inflation.

 Psychological: Viewed as sign of economic weakness.

 Creditworthiness of a country may be jeopardized.

 Successive rounds of devaluation. Trading partners may

become concerned that devaluation might negatively
affect their own export industries.
 EXCHANGE RATE
 The year 2008 has been termed disastrous for the
rupee.

 So far it has lost 23% of it’s value since December

2007.

 Record low of Rs 81.4 against US$ 1.

 In April 2008 Dollar was traded at Rs 64.

 A few months back it was Rs 60.

Exchange rates: Pakistani
rupee (PKR) per US$1
RATE YEAR/DATE
 84.00 (16/10/08)
 71.50 (26/07/08)
 63.50 (01/04/08)
 60.50 (01/11/07)
 60.75 (05/08/2007)
 58 (2004)
 57.752 (2003)
 59.7238 (2002)
 61.9272 (2001)
 53.6482 (2000)
 51.90 (1999)
 44.550 (1998)
 40.185 (1997)
 35.266 (1996)
 30.930 (1995)
 FACTORS CAUSING
DEVALUATION
 Foreign Currency Reserves falling $800 to
$900 per month.
 Law and Order situation.
 Flight out capital $70 million a day.
 Gap between import and export bill.
 Downgraded credit rating by International
Rating Agency Standard & Poors and
Moody’s.
 Inflation rate more than 25%.
 Widening Current Account Deficit.
 Heavy Government borrowing to cover
budget deficit.
 BALANCE OF PAYMENT
 BoP measures the payments that flow
between any individual country and all
other countries.

 Determined by the country's exports and

imports of goods, services, and financial
capital, as well as financial transfers.

 Comprises
 Current Account
 Capital Account
 Financial Account
 BoP and PKR
 Pakistan has a huge trade deficit, and our exports are very low.

 The dollars we get as a result of exports is small compared to the

dollars we have to pay for our imports.

 We need dollars and cannot afford to let go of whatever little we

get in the form of our export bills.

 If the rupee appreciates in value against USD, that will increase

our export bill for the buyer, and if that happens, we risk losing
that client to a cheaper alternate, like China or India.

 In order to 'retain' our exports, the state bank manipulates the

exchange rate for rupee, to ensure that it doesn’t appreciate by
too much against the dollar.
 EXPORTS
 Some of the items of its exports are oil seed, cotton, rice,
wool, fish fresh, chilled frozen, tobacco etc.

 Main export items are rice and Cotton.

 Pakistan also faces severe competition in the world market

like other developing countries.

 Even with good harvest after good climate Pakistani goods

can fetch good prices only if harvesting in competing
nations was bad due to unfavorable weather.

 Pakistan's exports stood at $17.011 billion in the financial

year 2006-2007, up by 3.4 percent from last year's exports
of $16.451 billion.
 IMPORT
 Main items of import are petroleum and
petroleum products, vegetable oil and fats, team
wheat, milk and cream etc.

 Import of petroleum and petroleum products is

very vital for the survival of the economy and
have been on the rise in the international market.

 Pakistan's imports stood at $30.54 billion in the

financial year 2006-2007, up by 8.22 percent
from last year's imports of $28.58 billion.
 DEFICIT
 Pakistan suffered a merchandise trade deficit of $13.528
billion for the financial year 2006-7.

 In 2002-3 the deficit was only $1.06 billion.

 The combined deficit in services and goods stand at

$17.653 billion which is approx 83.5 percent of country's
total export of $21.136 (Goods and services).

 The rise in the trade gap has been attributed to high oil
import bill, and rise in the prices of food items, machinery
and automobiles.

 Current account deficit - Current account deficit for

2006-7 reached $7.016 billion up by 41 percent over
previous year's $4.490 billion.
 FOREIGN RESERVES
 As of October 11, Pakistan's foreign currency
reserves totaled $7.75 billion, having fallen $570
million in a week.

 Critically, the central bank's share of this has fallen

to $4.34 billion, while commercial banks held $3.41
billion.

 As a result of deteriorating external balances and

dwindling reserves the rupee fell almost 2.8 per
cent in a day to a record low of 84.40, having lost
27 per cent since the start of 2008.

 Losing $800 to $900 million per month.

 LAW & ORDER
SITUATION
 Bomb explosions and Firing on citizens.

 Gravely affecting social, political, economic and

religious fabric of Pakistan.

 Talented people are leaving the Land of the Pure

for good because their fate is in the doldrums.

 Thus menace of “Brain Drain” is continuously

depriving the country of the intellectuals that are
the true assets
 Our tourism industry is in the doldrums due
to security concerns.
 In January and February 2008, a large
number of people living abroad, including
foreigners and Pakistanis, visited Pakistan;
however, the number has decreased in
March.
 A large number of people from Pakistan
went abroad during March.
 Affecting areas like
 Local business
 Foreign investments
 Sports
 Entrepreneurship opportunities
 Development projects
 Civil life
 SITUATION IN NORTH
PAKISTAN
 Only 14 foreign tourists visited the
museum in May and June, two
busiest tourist months.

 Tourism has dropped 95%.

 The Frontier province has lost $40

million in the past five years, almost
$8million a year.
 Prolonged political uncertainty,
 Fragile economic situation,

 Deteriorating law and order in the northern

part of the country, and
 The US threats of direct attacks in tribal areas

Have not only shattered the confidence of

foreign investors but also forced domestic
investors to pull out of the equity markets.

 Local Investors have lost billions of rupees

with a single investor having reported 13
million alone.
 DOMESTIC ISSUES
 The World Economic Forum put
Pakistan at number 91 out of 125
countries in the global race for
competitiveness.

 48 ranks behind India (at No. 43)

 Nine critical factors were highlighted.

1. Institutional Infrastructure.
2. Macro-Economy (86th )
• Low levels of per capita income
• High incidence of poverty
• Unemployment
• Illiteracy
• Widening gap of trade accounts
1. Health and Primary Education (104th )
• Almost 3 to 4 per cent of the federal budget is spent on
the education sector.
1. Market Efficiency (54th )
• Free-market mechanism,
• Positive role of regulatory bodies,
• Conducive macro-economic policies,
• Meaningful incentives,
• Trade liberalization,
• Financial deregulation,
• Corporate governance, and
• Political commitment
5. Technological Readiness (89th)
6. Health and primary education
(108th): The present government
had sanctioned Rs450 million for
PSDP in the current budget.
7. Poor Work Ethics
8. Business Sophistication
9. Innovation
 GLOBAL ISSUES
Global Financial Crunch
 America saw two of its legendary firms bite
the dust over the weekend.
 Some foreign banks have been asked to cut
down their exposure in Pakistan.
 The market was short of dollars also because
of the State Bank’s buy/swap operations.
 Cont….
SUBPRIME
 The subprime virus has truly gone
global.
 Major banks and other financial
institutions around the world have
reported losses of approximately
US$435 billion as of 17 July 2008.
 It shook the strongest of economies
forcing countries to intervene to save
their economies.
 Cont…
Food Crises.
 Our economic crisis is driven primarily by the
global economic crisis.
 Food crisis blessing in disguise for America.

 For us the food crisis should be much less acute.

CONCLUSION