The currency market had been searching for a reason to gloom and the State Bank Governor seems to have provided that trigger in the form of a rather gloomy interview to the Wall Street Journal. No sooner had the Governor stated that the country may head back to the IMFs window soon, the currency market went into overdrive. In the frenzy that ensued, the local currency wound up at a historic low of Rs.94 per USD. The sentiments on display here are not unsubstantiated. The Governors statement is a strong endorsement about the deteriorating state of fundamentals and a hint of the limits of the SBP in terms of possible interventions to keep currency parity at reasonable levels. Participants in the open market are driven by fear; in this case, the fear if the exchange against the greenback slips past Rs.95; it may not stop until it hits the century figure. The facts narrated in the Governors interview are not new and are already known to the market and fairly priced in. So the chances are that market has overreacted; and it may cool down in a day or two. The central bank may also intervene in the market today, after watching from the sidelines on Wednesday. So we may see the fiscal year ending in the band of Rs.92-94 per USD. Still the dollar buying spree this week is a reality check about the fragility of our foreign reserves base. SBP liquid reserves are down by $3.4 billion in this fiscal year. The latest number, that is to be released later today, may show a further fall of $300-400 million. With virtually quarter of central banks liquid reserves vanished in just a years time; SBP has little option besides calling a spade, a spade. The trade gap is widening and the only tap to fill it is home remittances but with a shortfall of $4-5 billion per annum. There is nothing to cheer on the foreign direct investment which is even less than a billion dollars a year now. The coming year appears to be even tougher - the current account deficit is likely to widen to $4.5-5 billion; IMF payments to the tune of $2.6 billion are to be made. With no respite to FDIs, do your math - $7 billion reserves going to be in thin air leaving the SBP with mere 2-3 months of import cover, including the peoples money lying with the banks. What is the plan B to cater to this issue especially when oil prices go a little higher than expectations? The only window is to reenter into the IMF programme; SBP Governor just explicated the inevitable. 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. Negotiating for the restoration of CSF and other bilateral and multilateral flows may entail bargaining away an arm and a leg.
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