No rush in currency market
After crossing the psychological barrier of Rs90 per USD, the depreciation of the local currency has stymied in the nervous nineties over the past four months. And this fiscal may close with the USD exchange rate hovering around Rs90-92.
All the worse possibilities appear to be priced in at these levels. IMF payments to the tune of dollars 700 million to be paid in this last quarter, further worsening of the trade deficit, sour relations with the US that are impeding CSF flows and other bilateral flows including proceeds under the Kerry-Lugar Act and the lack of impetus to rekindle dwindling FDI flows.
In the absence of any further external shock like a hike in oil prices (which appears unlikely at the moment), the currency market is likely to remain stable in the fourth quarter. SBP liquid reserves stood at $11.9 billion on Friday and may drop to $10.8-11.0 billion by June end. SBP officials expect forex reserves to stand around $11.3 billion, by the close of FY12.
These numbers are estimated without accounting for any prospective proceeds from the Coalition Support Fund or the long pending privatization proceeds of approximately $800 million for PTCL, or from the auction for 3G licenses which would have tallied around $800 million. Neither does this sum include any of the promised $550 million promised at the IMF- World Bank spring moot by multilateral donors.
If any of these inflows do materialise in the countdown to the end of this fiscal, the Rupee may be in for a positive boost; but chances are low.
But before the confetti starts flying, it would be pertinent to glance at balance of payment vulnerabilities which constitute the presence of an elephant in the room. Not only are BoP concerns the biggest hurdle to a sustainable economic recovery, they are also the determinant factor which make a return to the IMF program a certain eventuality.
The export bonanza is over. International prices of exportable commodities including cotton have dropped significantly, impacting prices of value-added exports, albeit with a lag. Experts have dropped four percent, year-on-year, over the past three quarters and growth may sputter further in the final quarter.
Import are heading northward, exhibiting 15 percent YoY growth in the 9MFY12. The trade gap has widened and this trend is likely to continue. Remittances are the saving grace, having risen to a staggering $13.5 billion this year. But even the inflows from expatriates are not enough to stem the erosion of foreign currency reserves at the central bank.
In a nutshell, sanity is likely to prevail in the last quarter; but if we are not able to attract foreign inflows in the form of FDIs, bilateral and multilateral inflows; the picture may become gloomy with coming IMF payments and soaring oil prices.
Vulnerabilities on external accounts may be a thorn for the Foreign Office as well, which may find an independent foreign policy and dollar inflows to be somehow negatively correlated.