Foreign exchange reserves: worst is over
There is no fundamental reason for the local currency not to remain stable at current levels. The worst seems to be over; major depletion of foreign exchange reserves has already taken place. Now the relative stability of the current account should provide cushion to foreign reserves and also calm the currency market.
Big chunks of IMF loan repayment were paid last year including $1.3 billion paid off in FY12, $4.3 have been paid back to IMF during last two years. The liability to be cleared this year stands at mere $370 million.
On the other hand, a deal with IMF is imminent in the form of a $6.6 billion Extended Finance Facility. The schedule will probably be made up of many equal tranches over the next 36 months. Upon IMF nod, other multilateral agencies have commitment to disburse $1.5 billion per year for coming five years.
Last year was tough. Apart from an outflow of $3 billion to IMF, government offloaded $3.3 billion of its foreign debt. That is why, foreign exchange reserves were sliced by $4.8 billion last year. Since the start of FY11 the fall was staggering $8 billion.
No wonder, the rupee slid 9.1 percent and 5.4 percent in FY12 and FY13, respectively. Had the current account deficit not remained subdued it would have been a free fall.
With continued stability in trade account, SBP expects its reserves at $6.5 billion (gross: $12 billion) by the end of this year. Currently, foreign reserves are at $5.3 billion (gross: $10.3 billion). Hence, the pundits are forecasting rupee to average at Rs102.5 against the US dollar in the inter-bank market this year.
The rationale is plausible. Bigger hump of financial accounts is gone. There is no sizeable payment on the horizon while inflows are going to dominate. On the import front, sluggish global growth is favouring us by keeping oil prices in check. Every $5 fall in oil price saves $750 million on the country’s import bill.
The lesson is not be concerned about the volatility of the shallow open market. Its size is just a tenth of inter-bank market and, hence, fundamentally it cannot unilaterally jolt the strength of the inter-bank market. The recent havoc in the kerb market was kind of a protest against enhanced measures to document the economy.
Nonetheless, SBP dealt with the pressure tactics well and promptly by waiving the condition of showing NTN number for transactions in the open market. No wonder the shades of the economy are getting grayer day by day.