The confidence on currency stabilization is deteriorating. Looking at the trend of foreign exchange for the last two months, you will find that the rupee dollar conversion is happening amongst private savers amid the SBP burning the dollar fuel fast to keep the currency equilibrium intact.
In June, the SBP reserves fell by $272 million while the reserves with banks increased by $510 million to make the net increase in reserves to $238 million. The sudden increase in net banking reserves indicates that people are expecting currency to fall and they have started converting their savings into dollars. And the trend continues in July.
There should not be any surprise: the pattern of external vulnerabilities amid political uncertainties is known to all; and investors expectedly reacting accordingly. The FE25 accounts are foreign currency deposits by residents and non-residents, netted by financing against it to exporters and importers.
When the confidence usually falls, the resident deposits increase and traders reduce their financing needs and both enhance foreign currency deposits. During June, the residents’ foreign currency deposits increased by $504 million or 8 percent. The one month jump in June is more than double of previous twelve month increase which is clearly depicting that people are expecting currency to fall soon.
The non-resident deposits fell by $84 million to $449 million which is showing that those who have global financial access are reducing their already thinned exposure in Pakistan. Overall deposits increased by $420 million. The financing by importers and exporters fell by $62 million in June which is not a big number to assert a trend.
Let’s see how the trend developed in July as both current account deficit and political climate worsened. The more worrisome fact is the sharp fall of SBP reserves - in four weeks of July, the central bank’s reserves are down by $1.46 billion or 9 percent to $14.7 billion.
This implies that current account deficit kept on falling in July (numbers are not published yet) while the finance ministry is no more active to raise debt to equalize it. In the political fight of Nawaz, short term economic management is compromised. The longer political clouds take to settle, the higher would be the impact on economy. As the fight come to the roads, it would erode the confidence further.
What about the dollar deposit holding in July? The number is yet to be published, but surely its increasing trend is maintained. The net foreign reserves of banks increased by $300 million in four weeks of July, making the cumulative increase since May end to $810 million. The number has crossed $5.5 billion for the first time in the history of Pakistan. Now the increase in FE25 could be due to fresh deposits or a fall in financing against it or a combination of the two. Back in Apr-08, the financing by traders was $1.8 billion which was thinned to $600 million by Oct-08. The currency depreciated by that time and the toll remained low till the end of 2010. It took 2.5 years to restore the confidence. Let’s hope history is not repeating itself.
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