The slipping and sliding PKR

You are travelling at top speed along the highway, when you realize the traffic is going the other way. Such seems to be the case in currency markets these days. The Pakistani Rupee (PKR) has been on a slippery slope for the past few years against its trading partners and competitors.
The rupee has been relatively stable against the greenback, falling just around 0.5 percent against its largest trading partner in the current fiscal year, compared to almost 6 percent since July 2009.
The relative stability is shattered when one looks at any other trading partners. PKR has shed 17.7 percent against the Japanese Yen and more than 17.2 percent against the Malaysian Ringgit. The story is much the same when one other major currencies.
Against competitors, like India, China, Bangladesh and Philippines the rupee has lost between 0.3~5.5 percent since the beginning of the year.
Largely, PKRs recent descent can be attributed to the relative appreciation of major global currencies against the US dollar. The Euro has appreciated more than 10 percent and pound sterling more than 6 percent since the onset of the current fiscal year.And, PKR being virtually pegged to the US dollar, has fallen as a result.
The debate over whether depreciation stokes inflation or vice versa, really depends on which way the phenomenon is being looked at.
If the burden of ballooning external accounts is exerting pressure on the economy, then depreciation is an inflationary phenomenon according a noted economist.
But if a currency has been stable and energy prices shot up by 60 percent in the past two years or so and commodities such as wheat and sugar sky rocket, then inflation can weaken the exchange rate position in any economy, another economist told BR Research.
But energy prices in dollar terms increased by a mere 7-10 percent in dollar terms in the same period. This also suggests that inflation today has some role of rupee depreciation yesterday - as rupee fell against the greenback by 41 percent since January 2008.
The depreciating domestic currency against trading competitors is an ominous signal for the economy. While exporters may gain immediate benefits, cost of production will rise in the short to medium term as imported inputs such oil, machinery and even raw material will become more expensive.
"The larger the share of imports in domestic production, the lesser will be the beneficial impact of currency depreciation," said Dr Ashfaque Hasan Khan, Dean of the NUST School of Business.
Depreciation aids export-led economies to remain competitive in the global marketplace. The feud over the artificially low exchange rate between the Chinese Yuan and the greenback is a case in point.
In Pakistans case though, where imports dominate international trade, depreciation can lead to further slippages in the rupees relative position against its trading partners, stoking inflation as a by-product.
Fighting inflation and achieving fiscal discipline are some key measures cited as damage control mechanisms that may reduce the damage to the economy.
While there is little light visible at the end of the corridor, there is nowhere to hide now that foreign direct investments are all but flowing and aid inflows from multilateral donors and donor countries are quickly drawing thin.
And if this situation continues, reserves might start falling like a pack of cards once the IMF loan payments start flowing out. However, this can be averted by rolling into another IMF program. But for how long?