Is exchange rate stability sustainable? – Newspaper

Pakistan's foreign exchange reserves held by its central bank plummeted to $ 7.74 billion on September 27 from $ 8.46 billion a week ago. But the currency markets remained calm and the rupee remained stable during the week.

This large drop in reserves was presumably the result of the external debt service at the end of the quarter. But is it also a sign of the pressure that the exchange rate might feel in the future? It could be so if we consider that the rupee was not under pressure in July-September despite the strong debt service, in part because the State Bank of Pakistan (SBP) continued to support it. The reserves had to fall towards the end of the quarter, as the central bank adjusted its currency positions to avoid becoming a net seller of dollars to the banks.

Under the current IMF loan program, the SBP is not prohibited from selling dollars in the currency market to control volatility. But it is supposed to square all those sales by the end of the quarter.

Since the beginning of this fiscal year, the rupee has remained stable: rather, it gained a value of 2.3 percent against the dollar during the first quarter ending September 30. But is this trend sustainable?

SBP reserves cannot cover even two months of our significantly reduced merchandise imports

In the last fiscal year, Pakistan borrowed billions of dollars from multiple sources, including Saudi Arabia, China and the United Arab Emirates. That help was crucial in the management of the external debt service.

At the beginning of this fiscal year, the country received $ 991.4 million as the first tranche of the IMF loan of $ 6 billion. This has helped SBP maintain a minimum level of foreign exchange reserves.

Since July, we have also been receiving up to $ 275 million in oil supplies from Saudi Arabia in deferred payments and that has eased the pressure of the demand for dollars. It is not surprising that the rupee rose to 156.36 to one dollar on September 30, an increase of 2.3pc from 160.05 on June 30 and remained at the same level until October 3. The currency reserves of the SBP also increased to $ 7.74 billion on September 27 from $ 7.28 bn at the end of June.

Despite this improvement, the central bank's reserves do not cover even two months of our significantly reduced merchandise imports. This should be a matter of serious concern to both the Ministry of Finance and the SBP.

Read: The trade deficit falls sharply by 38{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} in July-August

Pakistan's trade deficit was significantly reduced from $ 6.12 billion in July-August 2018 to $ 3.92 billion in July-August 2019. But the lower demand for oil in a slow economy, lower prices of oil and an increase in import tariffs on non-essential goods have played an important role. Deliver. Now that international oil prices are on the rise after a terrorist attack on Saudi oil facilities, oil imports could see an increase because we do not import all our oil from Saudi Arabia.

After the attack on Saudi oil facilities, oil prices have risen. Therefore, our import bill will increase in the coming months. Monthly imports of oil with deferred payment are allowed up to a certain amount. Beyond that, oil import invoices must be settled on due dates. The trade deficit has decreased due to a cut in the import bill and not due to the huge gains in exports.

Exports are growing very slowly (only 2.8{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} in July-August). And with the slowdown in the global economy and the persistence of internal structural problems that limit exports, one cannot expect a rapid and large increase in export earnings. Remittances have also begun to decrease. In July-August, they fell 8.4pc year on year.

The Gulf region, where we get more than half of our remittances, faces its own economic problems amid growing security challenges. Saudi Arabia and the United Arab Emirates continue to locate jobs and the former has begun to expel hundreds of thousands of immigrants accused of illegal stay. In the midst of this situation, the margin for the growth of total remittances remains low.

So far, the government has not been able to accelerate foreign direct investment (FDI), although portfolio investment continues to receive some inputs. In July and August, FDI inflows dropped to $ 156 million from $ 377 million a year ago. This is in line with the trend in the recent past, as FDI fell to $ 1.66 billion in 2018-19 from $ 2.75 billion in 2017-18. This is as much a reflection of inconsistent and less realistic policies of the ITP as of the regional security environment and the change in the priorities of global investors.

One reason we are not getting enough foreign investment is that local investment remains slow, which sends a negative signal to foreign investors. Now, Prime Minister Imarn Khan and the Chief of Staff of the Army, General Qamar Javed Bajwa, are trying to convince local business magnates to trust the economy and accelerate their investment activities. In a recent meeting with leading businessmen, Prime Minister Khan told business leaders that the National Office of Responsibility would no longer be investigating tax evasion cases, a practice that had scared businessmen as many of them slowed deliberately your business activities.

Published in Dawn, The Business and Finance Weekly, October 7, 2019