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The continuing turmoil in the forex market is a bewildering experience with no parallel in the country’s history. It raises some basic questions about the sustainability of the country’s balance of payments (BoP).

Until recently, the people had hoped that resumption of IMF (International Monetary Fund) support would restore stability in the forex market, which it did only for few days but then the turmoil returned with more aggression than in the past. Are there cogent reasons that can explain the current state of play in the market? At the outset, let’s first examine the most important piece of assessment contained in the latest IMF report, which states: “The program remains fully financed.

Financing commitments from bilateral and multilateral partners will help cover public gross external financing needs in FY23 and until the newly proposed end of the programme in June 2023 (Table 3b). Staff encourages all key bilateral creditors to maintain their exposure to Pakistan in line with program commitments.

Nonetheless, financing risks remain exceptionally high due to large public sector external rollover needs, the still sizable current account deficit, difficult external environment for Eurobond issuance given recent downgrades and high spreads, and limited reserve buffers to help cover the financing needs in case of delays in scheduled inflows. Firm commitments of full programme financing are in place for the next 12 months.”

An examination of Table-3b shows that against a financing need of $30.8 billion the available financing is $33.3 billion, giving an excess of $2.5 billion.

Together with IMF financing of $3.8 billion, the overall excess would be $6.3. This means at the end of the year, there would be an increase in reserves from $9.9 billion as on 3-6-2022 to about $16.2 on 30-6-2023. Furthermore, it is reasonable to expect that in the days ahead, especially in view of the production being affected due to floods, the demand for imports would be tempered, notwithstanding the additional imports of cotton and wheat.

The international price outlook (for oil, edible oil, steel, sugar, wheat) shows declining trends and would help moderate import values. Based on this, we may conclude that BoP is expressing a fairly good position of external account.

It has to be noted, however, that despite the availability of requisite financing for the year, the Staff has made certain qualifications, which need to be analyzed for their impact on the programme. The first risk factor is public sector roll-over of credits. The total debt in this category as on 30-6-2022 is $10.8 billion as per SBP data.

The largest portion of this debt is owed to Chinese banks, who have been quite sympathetic for rollover requests. The short-term portion of this debt is $1.4 billion which is exclusively owed to multilaterals such as IsDB or its trading arm ITFC. These borrowings are routinely serviced through new inflows and hence they don’t pose any challenge.

The second risk is the large current account deficit (CAD). The key Items having a bearing on next year’s CAD are (i) a reduction in imports of $3.3 billion, and (ii) increased exports of $4.0 billion. We feel exports are somewhat optimistic while imports remain very high given the precarious situation we are facing, where imports in July and August (shipment basis) were $4.9 billion and $6.0 billion, respectively.

In these articles we have been urging the authorities to exercise greater discretion in allowing imports, particularly there is a relatively constrained export environment because of evolving global recession. Our recommended rule, which has been articulated by the finance minister also, is to limit imports to exports earning and remittances barring imports which bring specific financing. We have yet to achieve this target.

The third risk is related to raising new funds from the international capital market. Presently, the credit default swap rates are outrageous while the yield to maturity for the Sukuk due in December 2022 is nearly 40%. Pakistan would have to test the market for refinancing the Sukuk by simultaneous issue of new Sukuk for those who would like its continuance.

A similar refinancing was done in 1999 also when the maiden bond of Pakistan came up for payment and 99% of the bond holders agreed to refinance it. Otherwise also, the country would need fresh inflows to build buffers in the face of a fairly challenging external environment. Thus the risks are not insurmountable.

Based on the above discussion, we are of the considered view that the trends in the forex market are not consistent with the fundamentals of the economy. The exchange rate of nearly Rs.239/$ in interbank and Rs.245/$ in open market which have increased by 8.6%% and 9.4%, respectively, since 30 August, the day after IMF tranche approval are difficult to rationalize.

In an illuminating TV interview, the SBP Deputy Governor, Dr Inayat Hussain, has given his assessment of the on-going forex market situation. He has basically emphasized that the exchange rate is behaving according to fundamentals, which is contrary to the view we have taken. However, he has also underlined that there is a weak sentiment in the market in the backdrop of floods and somewhat higher imports in the first two months.

He has acknowledged speculative activity and indicated law enforcement measures adopted to curb illegal cross-border movement of currencies. Remarkably, he disclosed that some banks had indulged in profiteering and over-charging forex rates and that show-cause notices have been issued for this purpose.

We hold the view that there is disorder in the market. Forex market is too sensitive to be left to the vagaries of speculation and market sentiment. After all, we cannot find a parallel to what is going on in the market in country’s history. Last time such wild fluctuations were seen perhaps was in May 1998 in the aftermath of freezing of foreign currency accounts. Nothing has happened in the country in the last six months – even when you allow for the political instability – which is remotely comparable to that tumultuous event.

Accordingly, we would strongly urge administrative and oversight measures together with a policy of austerity to reduce the demand for imports. These measure would help stabilize the market.

Copyright Business Recorder, 2022

Waqar Masood Khan

The writer is a former finance secretary, government of Pakistan


Comments are closed.

Anjum Bashir Sep 21, 2022 11:40am
Fully endorse the analysis of Dr. Waqar Masood. Policy of austerity seems to be a good fix up.
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Mazhar Ellahi Sep 21, 2022 04:07pm
Wonderful analysis and suggestions. SBP authorities should take ground realities in to consideration instead of bookish rules.
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Ali Mahmood Sep 22, 2022 07:03am
Waqar Saheb is more optimistic about the fundamentals of the economy than many other specialists and sees market sentiment as an anomaly. The solutions that he advises are based on his optimistic analysis. Many believe that the strong trend of rupee decline will continue and may take the rupee - dollar rate above 300 in the first six months of 2023. Let's wait six months to see which view proves right.
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