The depreciation of the U.S. dollar over the last month has exacerbated the negative effects of the Pakistani rupee’s sudden rise, squeezing the profits of textile millers.
At a recent press conference in Karachi, SM Munir, chief executive of Trade Development Authority of Pakistan (TDAP), expressed his concern about the rupee’s instability and its potential impact on the textile and apparel industries. “If a dollar is not stabilised, we fear that more export-oriented industries would shut down.”
Textile millers have been hit particularly hard, straining under the weight of growing currency exchange losses. Yasin Siddik, chairman of the All Pakistan Textile Mills Association (APTMA), said that at least 70 spinning and weaving mills were forced to shutter their doors, a sizable slice of the country’s 400 mills.
Siddik has pleaded with the Pakistani government for immediate assistance. “We want the government to tell us where exactly the rupee is going to stabilise against the dollar. Textile exporters have already faced the brunt of $300 million in exchange rate losses and huge cotton inventories.” Siddik proposed that the government disburse a 10 percent rebate to textile exporters to cover the losses they have incurred as a result of the rupee’s volatility. “We just want the government to provide rebate on business deals textile exporters made during March-September 2013.”
According to Siddik, the crux of the problem is not the rise of the rupee, in particular, but rather the suddenness of its appreciation, making it impossible for textile exporters to craft a steady financial strategy to accommodate it. “When the dollar was appreciating against the rupee, the exporters were making small gains like 10-20 paisa per dollar. It was a slow and gradual process. However, the depreciation of the dollar was abrupt which is why it jolted the business cycle of exports.”
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Also, the U.S. dollar’s precipitous slide in the last month, dipping by nearly 15 percent in relation to the rupee, has only made matters worse. Siddik said, “We closed our export deals calculating greenback at Rs105-106 and now we are getting Rs96 for a dollar. We are still uncertain where the dollar [depreciation] would end up.”
Some of the consternation on the part of textile millers is borne out of the impression that the Pakistani government has contributed to its own currency woes. The appreciation of the rupee has been supported by several government measures; a prohibition of the importation of gold certainly boosted the currency’s value. And now a tempestuous debate has erupted over the nature of Pakistan’s newly interventionist monetary policy and the disparate ways the rupee’s rise will affect different compartments of the economy.
According to a report in Pakistan Today, anonymous sources claim that the government has accelerated its buying of U.S. dollars for the purposes of propping up the rupee. “The State Bank, on the behest of exporters, has been buying dollars from the free market. Otherwise the dollar would have come down to Rs 98 level.”
The Pakistan government vehemently denies engaging in any currency manipulation. Umar Siddiqui, an SBP spokesman, said, “I have no idea about any such development.” Siddiqui claims the rupee was already on the rise due to bilateral and multilateral capital flows slated to come in soon. Also, Malik Bostan, president of the Exchange Companies Association of Pakistan, said, “The current exchange rate is not artificial. Rather, a banks cartel backed by some influential politicians has been conspiring to make the rupee depreciate to a record level.”
Additionally, Pakistan received foreign direct investment of $523 million dollars from the U.S. in the first seven months of their fiscal year, with $106.9 million in the month of January alone. Also, the Pakistan government expects $550 million from the International Monetary Fund next month. Overall, the country increased its foreign reserves to $9.5 billion. An increase in foreign reserves typically functions as an anti-inflationary measure. Also, an influx of workers’ remittances has remained robust for 2014, increasing a brisk 11 percent over last year to $10.2 billion. In February, total remittances stood at $1.2 billion.
The effects of the rupee’s upward movement has been positive for some and negative for others, creating a schism within the business community. Importers and money exchangers have greeted the currency’s appreciation with open arms while exporters have decried the development as economically disastrous.
Experts are still unsure what the ultimate impact will be on prices and how long it will take for those consequences to set in. There will likely be an improvement in the price of domestic consumer goods. The prices of gas and diesel should also drop modestly. And while goods imported into Pakistan will be cheaper for domestic consumers, apparel and retail businesses should expect the cost of Pakistan’s exports to continue to increase sharply.