On Aug 26 this year, in the interbank market (I/B), Rupee closed at 168.4353 (all-time SBP low close). Since then, Fiscal and Monetary measures gave a boost to the economy that helped Rupee to recover. The Rupee continued its upward journey against the US Dollar for nearly 2 and a half months. This week PKR tested the eight months high of 158.12, but failed to break below the crucial 158 levels.
Yesterday, PKR was traded at a low of 160.90, trading in a 278 paisa band in the last Two days. Though the market is choppy, quotes are wide as one percent move in currency during the day is considered quite normal by international standards.
Let me remind the readers that in March, I/B market witnessed a nearly 13 Rupee move between Rs 154.20 and166.85. In March, Rupee was choppy trading in a 9 Rupee band. In April, Rupee moved in a 6 Rupee band. In June it moved in a 5 Rupee band. In July, USD made another attempt to push Rupee to new lows, but got exhausted around 168.40 levels due to record remittances. In August, USD made another unsuccessful attempt to close above 168.50. In September USD lost its gloss and Rupee started making gains until this week, as Rupee has weakened by 1.75 percent. After gaining 6.4 percent in nearly 2 and a half months, the depreciation of Rupee is in the corrective phase. In the last couple of days there was no major debt related payments, neither unusual demand was witnessed from the corporate sector, except for the few importers that rushed to obtain forward hedge, which is a normal practice in a volatile market condition. This is why 1 month to 6 months forward swap points are up between 12 and 55 paisas. Hence, right now the Khan administration is not worried about leaving the exchange rate for the market forces to decide. It provides space to exporters to take a breather. After a hue and cry by the exporters, a 2 to 3percent correction/depreciation is understandable. But the decline should be gradual and in an orderly manner. The other pressure factor is due to a plunge of parallel market rate below the inter-bank market rate. SBP could be supporting the kerb market to bring stability. But it may not be as easy for them to manage, due to compliance and the FATF factor.
Exporters should know that Rupee gains during the last 75 days did not slow down the exports. The government has already announced a reduction in electricity rates to support industries and exports. Instead, they should be prepared to take the blame if they do not deliver, as the pace of growth is nominal.
Whereas, earlier a sharp decline of Rupee was certainly extended and was an unbalanced factor, as it never served the purpose. The cost of depreciation to the nation and to the government is too high in the shape of inflation, which makes the life of the common man miserable and increases debt.
Furthermore, the Real Effective Exchange Rate (REER) since December 2018 is well below 100 and this writer is expecting the new number dip below current 94.1199 or even if it moves up, it should not matter, as long as it gets close to 100 or beyond.
Hopefully, the phase of correction will soon be over. With improved and supportive economic data, this writer does not see any reason for a weak Rupee. Current account surplus rose for the fourth successive month reaching $ 1.2 billion. Increase in remittances is a big help, which is a huge support. Fertilizer, Cement and Automobiles helped, Large Scale Manufacturing (LSM) is going to make a big leap. Speed of rise in debt though is very concerning as the economy is not generating enough revenue to reverse the rising debt numbers, but a sharp cut in policy rate and Rupee gain are helping the cause. Importantly, higher Foreign Exchange Reserves too support a strong Rupee.
However, this writer has a few more observations to make about the economy. SBP's mid-year performance review of the banking sector suggests a 7.8 percent banking sector growth and a hefty SBP profit is not a good omen as the pace of profit growth does not match the private sector growth and the economic growth. Loan to deposit ratio has plunged below 50 percent. This is why the economy will never pick up to the desired level to offset debt/borrowings unless the ratio is pushed above 70 percent.
Further, SBP (MPR) estimates that bank investments are likely to remain strong in the 2nd half of CY20. This is not very encouraging for private sector growth. My concern regarding the probability distribution for Real (GDP) growth rate is that without proactive administrative measures, food shortages can reoccur. This could push inflation higher that will increase risk of hike in policy rate and add pressure on Rupee. While the rise in oil prices will always remain a big threat, as the country has to import over 80 percent oil.
However, the IMF is surely one key factor that could influence both - exchange rate and policy rate. Talks with them are expected soon, but there could possibly be further delay in release of overdue IMF tranche, as the government has offered another tax amnesty scheme by allowing the investors to invest their undeclared funds in construction business without income disclosure. This could be the hindering factor for the delay. Exceptions are always there, nevertheless Pakistan has to request for an IMF waiver.
(The writer is former Country Treasurer of Chase Manhattan Bank)
Copyright Business Recorder, 2020