After some wild gyrations earlier in the year, sanity seems prevalent in the foreign currency market, lately. The gap between the kerb market and inter-bank has narrowed.
Some market observers believe demand for the local currency is high as billions of rupees are flowing into the country to finance political campaigns during the run-up to the 2013 General Elections. And this flow is also helping to correct the anomalous gap that had hitherto existed between the kerb and inter-bank markets.
Still, the driving force is the inter-bank market and there are signs on this front which the local currency may firm up in coming weeks.
Importers that had been busy hedging their positions at the beginning of this year have settled down in recent weeks. Exporters too, don seem rushing to delay payments.
Based on the real effective exchange rate, the local currency should gain strength relative to key foreign currencies such as the US Dollar. If the process of bringing in a new democratic government continues to move smoothly, the greenback could rally, uncharacteristically.
Sounds exciting, doesn it? But there is a caveat.
Exogenous factors, foremost among which is the energy gap; are hindering the productivity enhancement as well as choking balance sheets of the corporate sector. Secondly, confidence among foreign investors is as dependent on the law and order situation as ever.
Obviously, economists at the central bank cannot do much about either of these issues. But that institution is making efforts to reduce the vulnerability of the Balance of Payments.
The signing of a swap agreement with China is a move in the right direction as it provides incremental liquidity to the tune of $1-1.5 billion. Diversification of foreign exchange reserves held by SBP is another welcome move.
When it comes to bilateral trade with China, the flow of goods is predominantly from the Oriental Giant, to this country. For this reason, the benefits of this swap arrangement will only accrue over a longer time period. But the benefits will come; especially as more Chinese investors are lured to invest here.
Unfortunately, the vulnerability of the BoP will persist; especially considering upcoming repayments to the IMF that will amount about $1.2 billion in the last two months of the current fiscal.
However, subdued international oil prices and ever-increasing inbound remittances are helping plug the holes so far.
The current account is expected to remain below the deficit of 0.5 percent of GDP and if oil prices on average remain below the $100-mark, the BoP may just stay balanced.
Any payments received on account of the Coalition Support Fund will be a bonus.
But none of these could alone take the economy out of the doldrums, and any new government with mantra of change is not going to have magic wand to resolve the impeding structural issues immediately. Hence, going back to IMF to have letter of comfort i.e. a new IMF Programme is inevitable.
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