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Following are the main reasons for appreciating value of Pak Rupee in first quarter of 2014

1). Increasing Foreign Reserves:Pakistan attracted more than $106.00 million Foreign Direct Investment (FDI) during the first month of 2014 while the FDI during the last seven months was amounted to over $500 million, according to the latest statistics released by the State Bank of Pakistan (SBP). In addition, the country expects $550 million loan from the International Monetary Fund (IMF) and about $500 million through the launch of Eurobonds as soon as the next month. Moreover, remittances from the overseas Pakistanis also jumped by 11% last year. The overseas Pakistanis sent around $10.24 billion during the past eight months as compared to $9.23 billion remittances during the same duration of the year before, the Finance Minister Dr. Ishaq Dar said today. Dar also revealed that the country witnessed around 17.7% increase in tax collection since the start of the fiscal year in July 1.

'2). Assistance from “Friendly Nation:' Pakistan last week received $750 million in the newly established Pakistan Development Fund (PDF) from a country which was termed as a “Muslim Friendly Nation” by the Finance Minister. The minister neither revealed the identity of the country nor told the nature of the receipt i.e. if it was a donation or loan. With the recent transaction, the total receipts in PDF have exceeded $1.5 billion in just one month. According to some commentators, Pakistan received the $750 million receipt from Saudi Arabia.

'3). Better than Expected Growth:'' Pakistan grew at five percent in the first quarter of the ongoing fiscal year as compared to just 2.9 percent growth in the same duration of the year before, according to the quarterly growth report released by the SBP on February 28. The fiscal deficit also dropped to 1.1% of the GDP during the first quarter as compared to 1.2% in the corresponding quarter of the year before, the SBP data showed.

4). Peace Talks & Political Stability: Investors felt comfort after the recent peace dialogue between the government and the Taliban. Almost all the political parties unanimously supported the government over the dialogue. Similarly, the political stability and considerable economic progress made by the new government in less than one-year duration is also a reason for the appreciation in the rupee.

CONCLUSION: So keeping in view the constantly increasing foreign reserves, rapid increase in the economic growth and favorable comments from IMF, the rupee is expected to continue the ongoing appreciation against the greenback which will consequently help the country to cope with the high inflation rate.

Economy of Pakistan: The salient features of Pakistan’s economic history are:

• Pakistan is self sufficient in most food production.

• Per capita incomes have expanded more than six-fold in US Dollar terms.

• Pakistan has emerged as one of the leading and successful producers of cotton and cotton textiles.

• Pakistan has developed a highly diversified base of manufactured products for domestic and world markets.

• Physical infrastructure network has expanded with a vast network of gas, power, roads and highways, ports and telecommunication facilities.These achievements in income, consumption, agriculture and industrial production are extremely impressive and have lifted millions of people out of poverty levels. But these do pale into insignificance when looked against the missed opportunities. The largest setback to the country has been the neglect of human development. Had adult literacy rate been close to 100 instead of close to 50 today, it is my estimate that the per capita income would have reached at least US$1200 instead of US$640.

Currency and Price Stability: Inflation in Pakistan has increased sharply as a consequence of the global financial crises, the 2010 floods and the following economic downturn. Inflation has increased as well as a consequence of rising energy imports. Rising food prices also cause severe problems for the poorer segments of society. The government has projected inflation to be at 10.5% for the fiscal year 2012 – 2013, which was the sixth consecutive year of double-digit inflation rates. The situation has only slightly improved since 2009, when inflation was at 13.6%.

Pakistan’s economic macrostability has further worsened, with the result that the country is heading toward another balance of payment crisis. According to the IMF, the new indebtedness has increased from 7.0% to 7.5% of the gross national product (GNP). Currency reserves are below $9 billion and foreign direct investment has declined, mainly because of security issues and infrastructural shortcomings. In contrast, an increase in remittances can be listed as a positive development. In October 2011, an IMF assistance package for Pakistan failed to be delivered as the government was unwilling to introduce reforms, such as a revised general sales tax, and to expand the tax base by including rural incomes.

The GDP/tax ratio has even fallen from 11% to 9% in recent years, which is among the lowest in the world.Economic PerformancePakistan as of the review period has not recovered from the economic downturn. GDP growth is too weak to support long-term development, as the country’s population growth is estimated at 1.8% per year since 2008. Because of security issues and infrastructure deficits, the attractiveness of Pakistan as a destination for foreign direct investment (FDI) has sharply decreased. In 2008, the net inflow of FDI was $5.44 billion; by 2011, FDI had fallen to $1.31 billion. The agricultural sector, the largest employer in Pakistan, is still characterized by low productivity because of highly Output strength.

ISHAQ DAR ACTIONS ON DOLLAR:

The US dollar depreciated against the Pakistani rupee, reaching a 9-month low, Express News reported on Tuesday. The rupee-dollar parity now stands at Rs99.90 in the interbank market, decreasing by Rs1.52 today. Speaking to The Express Tribune, Standard Chartered Bank Senior Economist Sayem Ali had said the rally is driven more by sentiments, as macros remain largely weak. “Sentiments have shifted due to positive IMF staff reviews, expectations of significant aid and investment inflows in 2014, and interventions by the State Bank of Pakistan (SBP) through the forward/swap market,” Ali had said. An inflow of investment in fiscal year 2013-14 also helped shift market sentiments in favour of the rupee. According to the SBP, Pakistan received foreign direct investment (FDI) of $523 million in the first seven months of 2013-14. FDI amounted to $106.9 million in January alone. In addition, the expected receipt of $550 million from the International Monetary Fund (IMF), along with the launch of Eurobonds amounting to $500 million likely next month, has also led to positivity in the foreign exchange market.

While appreciation of the rupee will contain inflation, a stronger currency will inevitably make exports less competitive.

“Hence, a widening trade gap will put more pressure on foreign exchange reserves, forcing the SBP to readjust the rupee to equilibrium levels,” Ali had noted.

The rupee onslaught on dollar continued which plunged further on Wednesday to 97.3 per US dollar before closing at Rs98.1 in interbank and Rs98 in the open market, panicking the speculators, dollar holders as well as the exporters, who think the whole tendency is manipulated and short-term as the central bank is no more an independent regulatory body.

However, majority of the financial experts said that better forex management by the SBP and a crackdown on currency speculators, besides growth in remittances, improved exports and reduction in import bills through deferred payment, helped the rupee’s impressive recovery.

With buyers almost absent from the currency market, the greenback might further drop against local currency, as the dollar witnessed a cut of Rs2.40 in a single day on Wednesday in the open market, experts say. Economists are expecting an ease in the prices of consumer goods, including petrol rates as well as power tariff because with the rupee gaining against dollar, the goods that the country imports will be available at cheaper rates.

Money market experts said that the local currency, marking the strongest appreciation of the last 30 years, has gained over 8% against the dollar since November 2013 when the rupee-dollar parity in the interbank market reached a high of Rs109. They said rupee’s gain owes most to SBP’s better management and introduction of stricter discipline in the forex market. Moreover, the foreign investment agreements including $20 billion deal with China on energy sector signed by the present govt has also fuelled optimism about exchange rate stability.

Exchange Companies Association of Pakistan Chairman Malik Bostan said that last time rupee experienced such a huge appreciation after the 9/11 attacks when it gained more than 6.2% against the dollar in Dec 2001. He said in the past, rupee was artificially depreciated and the greenback doubled its worth from Rs60 to Rs109. The present collapse of dollar is natural and not due to the efforts of the government, he added.

Sohail Khan, former SVP of the HBL, said the depreciation of the dollar would result in massive reduction in cost of imports and the banks were already expecting the dollar to fall below Rs100 mark, as there was no hurdle in the free fall of the dollar because exporters and investors were selling their holdings quickly.

Former Finance Minister Dr Salman Shah said that after many months the rupee has hit the mark of Rs100-a-dollar, gaining eight percent in a couple of months, reducing foreign debts of Pakistan by almost Rs700 billion.

Moreover, the country’s foreign exchange reserves have increased to $9.5 billion, he added. The continued stabilisation in the value of rupee will be instrumental in cost of imports and help reduce the price of commodities but this effect will not appear very soon and it will take some time to benefit general public, he said. He maintained that release of the stalled Coalition Support Fund, forex inflows under the IMF loan and from some friendly countries like China, UAE and Saudi Arabia played a key role to strengthen rupee.

Noted economist Dr Ashfaq Hassan said that forex reserves, which had squeezed by 28 per cent to $7.99 billion in January 2014 from $11 billion of June 2013, improved to $8.74 billion – helping the local currency to gain. He said that equity market, which also gives some reflection of the country’s economy, had continuously been showing positive signs. Dr Ijaz Nabi, noted economist and adviser to Punjab CM on economic affairs, observed that though foreign direct investment remained flat, several agreements have been signed with foreign companies, promising to pump in several billions of dollars into Pakistan’s economy in the medium term. He said that the proceeds from the spectrum auction will play a key role in strengthening the rupee’s value against the dollar in long-term.

Ijaz said that money markets tend to overreact to good news sometimes. The exchange rate, to be established in three to four months, largely depends on the realisation of inflows that Pakistan expects to receive by June. He said the country expects to receive loans of about $1 billion and $500 million from the World Bank and the Asian Development Bank, respectively, before the end of the fiscal year. Another $550 million from the IMF along with $500 million raised through the issuance of Eurobonds is going to pump Pakistan’s foreign currency reserves, he added. While the rupee’s strength will help contain inflation and bode well for Pakistan’s foreign debt profile, it will adversely affect the country’s export growth. According to Rice Exporters Association former vice chairman Samee Ullah Ch, the recent improvement in the rupee-dollar parity is going to result in erosion of revenue in export earnings, including rice, textile and leather etc. He questioned “what we are trying to achieve” with a stronger rupee. “Many of our exporters including like rice, textile and sugar have very thin margins. How can they compete with other regional traders if the rupee appreciates 5-7 percent in a week?”

Samee criticised the interference of the government in money market, lifting the local currency artificially which will impact negatively on the economy in the long run. Let the market run freely without any government influence to attract foreign investors. The artificial hike in rupee value to lower exports growth, leading to trade deficit and impacting negatively on economy, he said. Ch Samee said that the rice exporters alone will default the exports contracts of at least $400 millions just due to this short-term forced appreciation of rupee. Money experts are also of the view that that value of the local currency must go in tandem with the country’s Real Effective Exchange Rate (REER).

They said that the exchange rate must not be enforced by regulators rather it should be well-matched to the Real Effective Exchange Rate. While calling for a strategy to provide protection to exporters and maintain a stable rupee, the Lahore Chamber of Commerce and Industry President Engineer Sohail Lashari said that the rupee stabilisation would benefit the masses.

He said economy has now started showing upward trends but to maintain these trends the government would have to take extraordinary measures so that all the sectors could get equal benefits.

At the same time the finance minister should come up with some package of incentives to exporting sector as their margins have fallen sharply due to decrease in dollar prices, Lashari demanded. He said that the Indian government gave a 2% rebate to its exporters when the European Union granted GSP Plus Status to Pakistan. Saudi Arabia loaned $1.5 billion to Pakistan last month to help Islamabad shore up its foreign exchange reserves, meet debt-service obligations and undertake large energy and infrastructure projects, Pakistani officials have told Reuters.

The Saudi assistance has contributed to a sharp recovery of the Pakistani rupee, which rose to a nine-month high of 97.40 from 105.40 against the dollar between March 4 and 12, its strongest rally in 30 years. “On a personal guarantee of the prime minister, Saudi Arabia has given $1.5 billion, which has helped bail out the rupee,” one senior Pakistani government official close to the deal told Reuters, requesting anonymity as he was not authorised to disclose the source and purpose of the funding. The governor of the Saudi central bank declined to comment, and officials gave no details of the loan terms. Also read: Dar’s ‘dollar dream’ comes true Another top official who is based in Lahore said the money went into an account known as the Pakistan Development Fund set up to channel money from “friendly countries” like Saudi Arabia and the United Arab Emirates.

“We have a promise of a total $3 billion, of which $1.5 billion has been received so far,” the second official said. “Most recently, we got $750 million from the Saudis.” Pakistani Prime Minister Nawaz Sharif has long enjoyed close relations with the Saudi royal family. After his second term as prime minister was ended by a military coup in 1999, he was sent into exile in Saudi Arabia. Prince Alwaleed bin Talal, the Saudi financier and member of the House of Saud, has described Sharif as “Saudi Arabia's man in Pakistan”.

Pakistani Finance Minister Ishaq Dar confirmed on Wednesday that $1.5 billion was received under the development fund but declined to comment on the source. “Why do you want to expose our friends?” he told reporters. “The countries who have helped us don't want us to disclose the source.”

Thursday, March 13, 2014 - Islamabad—Finance Minister Ishaq Dar has said the present government has turned around the economy and all the economic indicators are showing positive results.

Giving an overview of government’s eight month performance in economic sector at a news conference here on Wednesday he said, the appreciation of Pakistani rupee reflects the confidence of the investors on Pakistan.

He said a stable currency will have salutary impact on the economy of the country and prices of petroleum products are likely to come down as a result of the appreciation of the currency.

He said GDP growth has witnessed growth while Inflation is declining which has also been endorsed by various international financial institutions including the International Monetary Fund. Inflation level remained 8.6 percent while GDP remained 4.4 percent during the first eight months of current fiscal year.

Ishaq Dar said stability in the currency rate will also help attract foreign direct investment which will lead to further strengthening of economy. He said there are also other positive signs of improving economy as 2490 new firms have been registered with security exchange of Pakistan during the last eight months as compared to 2166 registered in the corresponding period last year which shows growth of eleven percent in this field.

The Finance Minister said that tax collection has witnessed a growth of 17.7 percent. We have collected 1348 billion rupees in the first eight months as compared to 1145 billion rupees collected in the corresponding period last year.

Budget deficit has been reduced to 3.1 percent as compared to 4.1 percent last year. Home remittances have also seen an upward trend with growth of eleven percent. Home remittances of 10.24 billion dollars have been received by 28th February as compared to 9.23 billion dollars received during the corresponding period last year.

Ishaq Dar said exports surged to 16. 86 billion dollars in the first eight months as compared to 15.8 billion dollars last year.

The Finance Minister said it is expected that the government will be successful to achieve the target of four point five percent GDP growth rate as the latest results show that large scale manufacturing sector has registered 13.2 percent growth.

Ishaq Dar said government is determined to give a boost to the agriculture sector and for this purpose State Bank of Pakistan has been asked to increase small agricultural loan limit from 336 to 380 billion rupees this year.

The Finance Minister said stock markets have also achieved an unprecedented growth of thirty seven percent which is a record in the national history. He said foreign exchange reserves have surged to 9.52 billion dollars and hopefully the target of ten billion rupees will be achieved by the end of this month.

He said market capitalization has also increased from 5.4 trillion rupees to 6.3 trillion rupees which shows twenty six percent increase and in dollar term it has been registered at eighteen percent.

He said famous Japanese financial institution Jatro has declared Pakistani business growth at number two in the world while another international financial institution has predicted that Pakistan will become 18th biggest economy of the world by 2050 if the pace of economic activities remained sustainable. However, he expressed the confidence the government will achieve this target by 2025 by ensuring good governance and transparency.

Ishaq Dar said fiscal deficit which is biggest evil has been decreased from eight point eight percent to eight percent and the government will bring it at six percent by the end of this fiscal year. He was confident that fiscal deficit will be brought at the level of four percent at the end of tenure of this government.

ADVANTAGES OF APPRECIATING CURRENCY OF A COUNTRY: When your home currency gains in value against other currencies it appreciates meaning that the same amount of it is able to purchase a larger amount of a particular foreign currency. It is good news for a traveller planning to visit a country whose currency is depreciating against his home currency or for a migrant worker who intends to send money to his relatives abroad. Broadly speaking, appreciation means that if last week your one British pound was in parity to the U.S. dollar (1 pound buys 1 dollar) and the pound appreciated by 30 per cent during the week, now you will be able to purchase 1.3 U.S. dollars for your one pound.

This is an over-simplification of the process of appreciation of the currencies, though. The home currency rates go up when a currency appreciates but these foreign exchange rate fluctuations affect not only the value of the home and destination currencies but the entire economy as well. Higher currency rates i.e. appreciation of the currency means that the country’s exports become more expensive and imports cheaper, boosts demand for imported goods but lowers domestic exports. A process of currency appreciation could trigger a demands for lowering the costs of production and may lead to freezing of wages in the country whose currency becomes too expensive. Sometimes entire industries can be forced to move their production facilities abroad to take advantage of the lower production costs and more advantageous currency rates of the local currency.

Many governments around the world are apprehensive of appreciations of their national currency and forcedly restrain the national currency from making substantial gains against the major world currencies. Between 1985 and 1992, the currency exchange rate of the Japanese yen against the U.S. dollar rose from 254 yen per dollar to about 110 yen per dollar and the government in Tokyo was forced to intervene in the market to support the dollar in order to protect the competitive prices of the Japanese export to the United States. Many governments follow the example of Japan to save the competitiveness of their national economies and this is a good illustration of a widespread opinion that the high currency rates possess risk of economy downturn.

During the past decades, China has become a good illustration of a country, which keeps its currency undervalued supporting market currency rates that are lower than the real value of its home currency in order to deliver cheap exported goods to the outside world. It is not necessarily a bad thing or a bad policy although many developed countries including the U.S. and the European Union complain that China should untie the yuan and let it float free on the financial markets.The global political and economic chessboard is subject to rules other than the basic rules of the market economy, though.

In this global game, the currency rates and the appreciation or depreciation of a currency can be a hostage of long-term interests, which are often in conflict with the real market value of a currency and the present currency rates.

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