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September 20, 2020

Rupee foolish, dollar wise

Business

September 20, 2020

LAHORE: Perhaps irrationally deregulating Pakistani currency was the biggest blunder committed by this government that led the state to somewhat lose any control whatsoever it had over the prices.

Our economic planners know our import payments are double the amount we earn from exports. These imports therefore have a greater impact on our economy. The value of rupee against the dollar is of crucial importance for it. When currency devalues, cost of imported items and components, used by the local manufacturers, increases exponentially. It is not only the change in currency value that impacts the cost but also the taxes paid on these imports rise proportionally.

If the import duty on an item worth $1 is 10 percent and the sales tax is 17 percent on duty-paid value, the cost would depend on the value of the dollar. At Rs100/dollar, the cost would be Rs128.7 (100+10 =110x17 percent sales tax equivalent to Rs18.7) plus usual import charges.

The rupee was valued at Rs106.4 in December 2017 -six months after the removal of Nawaz Sharif as prime Minister. The dollar appreciated to Rs121.55 by the time the present government assumed power. That rupee value was considered adequate in economic realities of that time. The current value of rupee against dollar is Rs166.21 (fluctuates from Rs166-168).

The cost of the same item worth $1 with the same duty and sales tax rates would be Rs213.91 (166.21+16.62 =182.84 plus 17 percent sales tax equivalent to Rs31.08).

The above simple example shows the higher value of dollar has also added an additional Rs18.59 in the cost. About a 9 percent increase in cost of the imported item thus was due to rupee devaluation. If we take our total imports of $42 billion on above average tariff the government is earning additional levies of above $2 billion. This is the additional cost the consumers must pay over and above the increase in dollar value.

The devaluation of rupee hits the incomes of the salaried class. As 60 percent of the items they consume are wholly or partially imported.

Their purchasing power declines in line with rupee devaluation. In daily use items the cost of tea, edible oil, products made from imported raw materials, cars, petrol, and other items increase proportionate to devaluation plus the additional margins sellers charge on their additional investments.

To have a clearer assessment of the decline in incomes because of dollar appreciation let us consider the case of a person drawing Rs106,000 in December 2017 that was equivalent to $1,000. Now, that amount in dollar terms reduced to $872 only and at current dollar rate it would be merely $637. The person earning $1,000 equivalent in December 2017 is now earning $363 less.

We are talking about high-end earners. Their needs are different from low-end ones. They aspire for luxuries. The price of the cheapest car available for low-end high earners has increased from Rs800,000 to Rs1.3 million.

If we take the case of a person earning Rs50,000, his/her salary has dipped from $470 in December 2017 to $300 - a straight decline of 40 percent in earnings in dollar terms. The salaries have not increased as well during this period. The declining economy has in fact annihilated several jobs. Some employers have even cut the salaries of their staff by 15-40 percent. The plight of each segment of workers is visible to all. For the minimum wage earners, the situation is even worse. The person earning Rs17,000 in December 2017 was earning a pathetic amount of $159.7 in terms of dollar. Now that salary or earning has been reduced, in dollar terms, to only $102.28.

The devaluation has neither benefited the economy nor the exports and nor it has stabilised the Pakistani currency. It has made the life of all Pakistanis miserable and increased our foreign debt in thousands of billions in rupee terms. The increase in energy cost has also been due to weak rupee as we import most of the fuel, we need to generate power. Our RLNG imports have also become expensive in rupee terms.

We are beating the drums of economic recovery when it is time to mourn the miseries and trouble caused by the economic policies of this government. This government is trying to revive the economy without meaningful reforms. It lacks the muscle to confront vested interests.