Name: M Zuhaib Roll No: 1806

Subject: Intermediate Microeconomics

Rupee climbs to five-month high vs dollar

Currency dealers foresee rupee to rise further in coming months in the wake of higher inflows of dollars
and increased attraction of local currency.

The dollar traded as low as Rs154.70 in the open market on Saturday which was much lower compared to
Rs164 on June 26 this year.

We traded dollar at Rs154.70 as lowest and Rs155 as the highest rate during the day. These were lowest
prices since it touched Rs164, said Forex Association of Pakistan President Malik Bostan.

The dollar scaled new peak on June 26 after it hit Rs164 mark in the open market but soon started falling
against the rupee. The rupee has appreciated by 5.67 per cent against the dollar since June this year.

Currency dealers said the gradual appreciation of rupee helped stabilize exchange rate which remained
range bound in the Rs155-156 bracket for the last few months.

The stability can be attributed to steady exchange rates in the inter-bank market which showed the dollar
price at Rs155 on lower side and Rs155.10 on higher side on Friday.

The dollar in the open market usually trades above the inter-bank rates but for the last couple of months,
the open market rates have treaded closer to the inter-bank rates.

One of the biggest reasons is that the country has come out from huge current account deficit of $20
billion in FY18 and now[in] October, [it] posted a surplus for the first time after four years,` explained
Bostan.

He said both risk and attraction for dollar investment has gone. Now those holding dollars are liquidating
them to get rupee and benefit from the much higher returns on the local currency deposits. Due to high
policy interest rate of 13.25pc, the local currency investors could get double-digit returns on long-term
deposits.

Currency dealers at banks said the frequent inflows from International Monetary Fund, the Asian
Development Bank and lower outflows for imports have reduced dollar demand. Importers are not eager
to get forward booking, said a banker dealing in foreign currencies.

The country has reduced its import bill with slight improvement in exports helping the country`s foreign
exchange reserves to remain stable.

The import bill would further decline during the current fiscal year as Saudi Arabia activated its $3bn
deferred oil facility for the next three years from July.

Currency dealers said the government has now realized that the rupee was devalued more than the
requirement of free market. The market forces have now started setting the real exchange rate, they said.

Government Collects 18pc More Revenue From

Despite around 13 per cent decline in consumption, the federal government collected
about 18pc higher taxes on oil and gas products during first quarter (July-September) of this
fiscal year mainly because of higher rates.

Total revenue collection from oil and gas sector in the first quarter amounted to about Rs186
billion, compared to about Rs158bn in same period last year.

The quarterly data released by the Ministry of Finance reported proceeds of about Rs99.5bn this
year on account of Gas Infrastructure Development Cess (GIDC), Gas Development Surcharge
(GDS), petroleum levy, and discount retained on crude oil, royalties on oil and gas and windfall
levy against crude oil.

When compared with same quarter of last fiscal year, all these revenue heads had generated
about Rs83bn. As such, the collection from these six categories increased by 20.2pc year-on-year
during the period.

In addition, the government also collected about Rs87bn on petroleum products like diesel and
petrol in 1QFY20 on account of general sales tax, versus Rs75bn in corresponding quarter last
year, according to official sources.

Petroleum ministry officials said the consumption of petroleum products had declined by well
over 13pc in the first quarter and major reduction was caused by 30pc slump in furnace oil and
about 16pc in high speed diesel (HSD).

They explained that furnace oil consumption dropped primarily because of cheaper alternate
fuels but diesel demand had plummeted mainly due to higher prices and relative economic
slowdown.

The finance ministry reported that major increase in revenue collection came about on account of
petroleum levy that amounted to Rs65bn in the first quarter, as compared to Rs45bn in same
period last year showing a rise of 45pc. This was mainly attributed to the changed strategy of
federal government to raise more taxes through petroleum levy for being purely a federal tax.
Over the last year, the government has started increasing petroleum levy rates because it remains
in the federal kitty until (e GST that goes to the divisible pool taxes and thus about a 57pc share
is grabbed by provinces.

Conversely, the GIDC plummeted by almost 55pc to Rs2.72bn in 1QFY20 while the GDS
declined by about 33pc to Rs1.7bn, from Rs2.54bn in same period last year.

On the other hand, discount retained on crude oil amounted to Rs3.7bn during the period, versus
Rs3.144bn in same months last year, showing an increase of 19.35pc.

The royalties on oil and gas and windfall levy against crude oil moved in a close range.

The royalties this year amounted to Rs23.77bn, compared to Rs23.64bn and windfall on crude
dropped Rs1.965bn in 1QFY20, from Rs2.08bn.

These Egures do not include provincial tax collections through oil and gas and taxes arising out
of the value addition to oil products, such as power generation that is almost 70pc dependant on
furnace oil, liquefied natural gas and natural gas.

The government has already increased general sales tax on all petroleum products to standard
rate of 17pc across the board to generate additional revenues. Until January, it was charging
0.5pc GST on light diesel oil (LDO), 2pc on kerosene, 8pc on petrol and 13pc on HSD.

Besides the 17pc GST, the government has more than doubled the rate of petroleum levy on
HSD in recent months to Rs18 per liter, instead of Rs8, while levy on petrol had also been
increased by 50pc to Rs15per liter, from Rs10.

Meanwhile, petroleum levy on kerosene oil and LDO remains unchanged at Rs6 and Rs3 per
litre, respectively.

The finance ministry`s data recorded improvement revenue to GDP ratio. It said the total revenue
stood at 3.4pc of GDP in first quarter, as against 2.9pc last year. This was, however, mainly
because of higher recoveries on non-tax revenues amounting to 0.8pc of GDP, as against 0.3pc
last year. On the other side, tax revenue slightly increased to 2.6pc, as against 2.5pc last year.

Total expenditure was also contained at 4pc of GDP in the first quarter, when compared to 4.3pc
mainly because of reduction in current expenditure that stood at 3.6pc, down from 3.9pc. Mark-
up payments and defense expenses remained unchanged at 1.3pc and 0.3pc of GDP.

The budget deficit, therefore, came in at 0.7pc of GDP in the first quarter this year half of 1.4pc
in same period last year.