EDITORIAL: The Chief Executive Officer of the Saudi Development Fund (SDF), Sultan bin Abdul Rehman, and the Governor State Bank of Pakistan (SBP), Dr Reza Baqir, signed an agreement to deposit 3 billion dollars in SBP in compliance with “the implementation of the High Directive” issued by the King and Crown Prince of Saudi Arabia to “help support the country’s foreign currency reserves and help mitigate the adverse effects of the Covid-19” as noted on the SDF website.
However, no details were provided on the website as regards the tenure of this deposit or whether interest would accrue on this deposit. There are media reports that have not been officially denied, that indicate that the deposit would be for one year, which coincides with the duration of the International Monetary Fund programme, and the rate charged would be 4 percent annually.
If this is indeed the case, then this deposit sets a new standard reminiscent of hot money inflows though while the former is pledged by the Kingdom of Saudi Arabia to remain for one year the latter exits a country unceremoniously as and when the market situation changes.
True that the deposit had not yet been made when the agreement was signed on 29 November yet one would have thought that the contractual agreement would strengthen the rupee. That this did not happen and instead the PKR declined vis-a-vis the dollar to reach a historic low of 176.20 indicates that the country’s economic managers must revisit their policies that are the cause of a continuous rupee erosion.
Economists argue that the decline in the rupee maybe sourced to the harsh conditions agreed with the IMF, notably the money bill ending 330 billion rupee exemptions and the petroleum levy to be raised by 4 rupees per litre every month, conditions whose passage is likely to present a serious political challenge to the government.
However, while the SBP is at pains to claim that the rupee value is market-based as per the July 2019 agreement with the Fund yet the latter uses the term ‘market determined’, which is defined as when a central bank does not have a specific exchange path or target and indicators for managing the rate are broadly judgmental, including balance of payments position, international reserves, and parallel market developments.
In addition, adjustments may or may not be automatic and the intervention may be aimed at moderating the rate of change and prevent undue fluctuations (disorderly market conditions) that may be direct (through purchase/sale of dollars by the central bank) or indirect (exerting its power as the banking sector’s regulator). In other words, it is a judgment call by the SBP and this very judgment call is perhaps being questioned today.
Another agreement was signed between the SDF and the government of Pakistan in the presence of CEO SDF and Omar Ayub, Minister for Economic Affairs, to finance the trade oil derivatives with a value of 1.2 billion dollars for one year. This too would provide relief to our balance of payments position, with the trade deficit widening because of the increasing import bill due to rising international prices and the eroding rupee.
However, the one-year duration of both agreements would bring matters to a head next year at this time with both the IMF EFF programme and the agreements with Saudi Arabia reaching their scheduled conclusion which would be less than a year before the elections. The three agreements - two with Saudi Arabia and the sixth review with the IMF - portend the continuing erosion of the quality of life of the people, due to inflation and the rupee erosion.
Copyright Business Recorder, 2021
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