EDITORIAL: There has been a case of growing criticism on the State Bank of Pakistan’s (SBP’s) policies in recent few months as the country struggles to avert a looming sovereign default. Senior economists and analysts are blaming the SBP for not acting is accordance with its role that has received a much-needed boost in terms of its independence and autonomy through a constitutional stipulation.
It is indeed an eye-opener that the very people that had raised a hue and cry over SBP’s enhanced powers that it acquired in 2020 and 2021 are now castigating it for not exercising its autonomy under the law.
When the debate on the bill for SBP autonomy was in progress and most of the established commentators had serious misgivings about the proposed autonomy in the bill, this newspaper had strongly advocated the passage of the amendment and had becalmed the agitated critics of the amendment by explaining to them that there are two types of powers under any law in our country. One is de jure position based on the letter of the law, the other is de facto, which trumps de jure when the chips are down.
In other words, SBP did get de jure autonomy, but there is a strong perception that the de facto position has essentially remained unchanged by and large. This perception has definitely strengthened after the appointment of Ishaq Dar as the federal finance minister.
However, the criticism of the SBP’s role in the current crisis is not without basis. Everyone must share their part of blame and SBP is no exception either. Recently, it released a press statement to rebut media claims that capping the price of dollar caused a $3 billion loss in remittances and exports.
The SBP’s argumentation is premised on global slowdown, especially in developed economies where a decline in economic activity has resulted in higher interest rates and falling purchasing power, denting import demand markedly.
This has resulted in a decline of exports from countries like Pakistan. It has been argued that a fall in remittances is due to economic slowdown in countries from where remittances originate and opening up of travel after Covid-19.
These two factors have led to shifting of remittances from formal banking channels to informal cash transfers through travellers.
Global slowdown, higher inflation and interest rates, and falling purchasing power are undeniable facts and so is reopening of travel. There was a remittance boost in many economies due to travel bans and theoretically there must have been some correction.
A similar trend, for example, would have existed in other emerging economies as well. Let’s make a comparison. Pakistan’s remittances are down 11 percent in 1HFY23 (Jul-Dec 2022) while its exports have declined 7 percent.
On the other hand, Bangladesh’s remittances are up 3 percent in the 1HFY23, while its exports are up 11 percent in the same period. Similar is the data for some other economies, including India and Vietnam.
Many of these economies experienced a jump in remittances during Covid-19 because of drastically reduced travel but these are still showing growth. The argument for exports is along the same lines. The question why Pakistan is behaving differently when the global slowdown and increased travel are common factors for all.
The obvious reason is the existence of two exchange rate markets and administrative restrictions on imports through controls on Letters of Credit (LCs) and import contracts. Ever since the restrictions on imports were put in place, there is a noticeable decline in remittances as some goods were financed through the hundi/hawala by siphoning off formal remittances. For example, mobile phones were the first ones to face restrictions.
Their import payments (SBP data) are down to a mere $87 million in 1HFY23 (down by 90%) while the imports (based on customs data) stood at $363 million (down by 67%). The difference of $276 million is perhaps paid through hundi/hawala, and most likely to be netted through remittances coming via the same illegal channel. Similarly, there are many other items that are using the similar route of payment.
That is one reason for the decline in remittances. The other obviously is PKR’s peg with US dollar in the interbank market; arguably, a ‘Dar hallmark’. For the past 2 to 3 months, there has been a case of increase in the difference between the open and interbank rates and the authorities’ heavy-handed cap on open market rates through the licenced money exchange companies that resulted in the creation of a grey or dark market on which the bulk of the transactions began to take place.
Before the surrender of the cap in the interbank market the PKR-USD parity stood at around 230 while the rate in the grey market was hovering around 260. That resulted in a shift in flows of remittances to the informal market by many.
And seeing the growing gulf between the open market and interbank rates, many exporters kept the proceeds outside Pakistan in anticipation of currency depreciation in the interbank market, which happened in the last few trading sessions. And that has resulted in a decline in export proceeds. The restrictions on imports impacted the exports in a meaningful manner. Many exporters cannot buy machinery or its spare parts.
Their inability to do so has, therefore, hindered production. And they also faced issues in procuring raw materials that they use to process export items. That resulted in a fall in exports too. With the removal of the cap the interbank and open market rates are converging as they should, and checks with bank treasuries have revealed that there is a significant increase in remittances flows in the last 2 to 3 days, and some exporters are coming forward to sell as well. These are bound to positively impact the flows to some extent.
However, SBP’s latest move in response to a request of importers for allowing temporary/one-time facilitation till March 31 this year for clearance of backlog of imported goods with Bill of Lading or Airway Bill dated January 18 or before, on deferment of payment for at least 180 days or more is likely to fuel the demand for hundi/hawala to operationalise this concession by the central bank. It increasingly appears that remittances will show an uptick in February and March, but would not normalise by April or later.
Copyright Business Recorder, 2023
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