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However, in this circle, there is one loose end, which is the availability of $ in Dubai with the importer as the spare parts have been sold in Pakistani rupee in Pakistan. This means that the importer needs, for example, 1 USD in Dubai whereas he has rupees (more than 250) in Pakistan. This is an unofficial demand for USD.

On the supply side, the sources are (a) proceeds of under-invoiced exports retained in Dubai, (b) remittance handled by Hawala, (c) Afghan legal exports, and (d) trade in goods not allowed to be traded.

USD to PKR forecast for 2024 — I

For example, on the export side if $ 5 worth of goods are exported only $ 4 is billed from Pakistan, leaving $ 1 behind in Dubai with the exporter. $ 1 is available with a Pakistani to be sold or transacted with another Pakistani.

This is the supply side. There are ‘facilitators’ for these transactions, who charge commissions and such transactions take place in billions of dollars. The abusive role of exchange companies is of a conduit.

As on October 26, 2023 the exchange rate was Rs 280. This means that this rate has taken into account all the factors referred to in the diagram. The question under consideration is the identification of the factors that will deteriorate or improve the PKR-USD parity in 2024.

The Economist’s prediction of Rs 343 is primarily based on the fact that Pakistan will not be able to finance the gap of $ 21 billion as is appearing in the diagram on financing. This is effectively $ 13 if it is assumed that out of $ 10 outflow in financing $ 2 billion is interest and $ 8 billion is repayment of loan. There is a lot of weight in the said argument.

As a result of this gap the reserves will erode and the exchange rate will move adversely. This presumption is however based on the primary assertion that Pakistan will not be able to arrange additional loan financing of $ 13 billion in 2024.

The author therefore is of the view that Foreign Direct Investment (FDI) proceeds are not expected to be more than $ 1 to 2 billion. This means that there will be a gap of at least Rs $ 10 billion to be arranged through new loans.

The first question to answer this presumption is to enquire whether or not that eventuality has been taken into account whilst having an exchange rate of Rs 280. The author’s answer is in the affirmative. The future projections of forex requirements have been published in IMF report Table 3a on Page 35. They indicate availability of funds.

The other reason is academic. The REER (Real Effective Exchange Rate) and other indicators reveal that theoretically the exchange rate of Pakistan should not be above Rs 250. There are bases for the same which have taken into account the following factors which affect the exchange rates. These are:

a. Interest and inflation rates

b. Current account deficits

c. Government debt

d. Terms of trade

e. Economic performance

f. Recession

g. Speculation

This discussion is not aimed at examining the aforesaid factors. All these questions are summarised in one sentence: Whether or not Pakistan after taking into account the stringent corrective measures under the Stand-By Arrangement (SBA) is expected to enter into a recovery mode.

The answer will be in the negative; however, keeping in view the fact that the international and local environment, especially the establishment’s focus on economic issues, the gap of $ 13 billion is not very big for the economy of Pakistan.

The author’s assertion for an exchange rate being different from the negative perception by the Economist relates to ‘enforcement’ and ‘corrections’ against the unofficial sector’s demand. In the event Pakistan is able to curtail/contain this $ 16 billion leakage even to the extent of $ 5 billion, the whole scenario will change.

The demand side of undocumented transactions is to be reduced to that extent. The supply side will not correspondingly reduce as exporters and hawala cannot retain $ for a long time outside Pakistan as the profit within is much higher in Pakistan, even after taking the currency risk into consideration. So the supply will remain the same and the demand can be curtailed. This will result in stability in the exchange rate.

The official side is not going to change substantially. There will be a gap of at least $ 10 billion if the oil prices remain at the same level. Thus the only immediate correction Pakistan requires is a scientific approach to the challenges of Afghan trade, under-invoicing and smuggling.

Lastly, the interest shown by US investors in the country, especially in mining, is only symbolic. It is important to note that people in Washington appear to lend a helping hand to their old partner with some caveats, which, in the opinion of the author, are not against the economic interests of the country. Economic interests should override all other considerations, so to speak.

In this situation, if corrective measures continue with enforcement of the writ of the government there is no reason why in 2024 the PKR should not trade at 250-275 against the USD.

(To be continued)

Copyright Business Recorder, 2023

Comments

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M M Alam Nov 01, 2023 07:36am
Real Effective Exchange rate (REER) is an index of the price of a basket of goods in one country relative to the price of the same basket in that country's major trading partners. The prices of these baskets expressed in the same currency using the nominal exchange rate with each trading partner. The price of each trading partner's basket is weighted by its share in imports, exports, or total foreign trade. The present REER is 91.7173 (SBP, September 2023). This does not mean that USDPKR should be at 283x0.917173=260. Appreciation (depreciation) of REER is sometimes confused with the concept of currency overvaluation (undervaluation) while these are two separate concepts and not necessarily interpreted in the same direction. For an assessment of a country’s exchange rate misalignment, a more sophisticated analysis is required taking into account factors such as demographics, external and fiscal sustainability, and some other macroeconomic fundamentals over the medium-term.
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M M Alam Nov 01, 2023 08:02am
If we look at the chart of USDPKR and REER over the past decade or two , you will notice an absence of correlation. In the list of factors influencing exchange rate movement , you have omitted 'political stability' which is the fourth most important factor along with 'future expectations and perception about the country'. Are we sure we will meet our export targets? Are we sure all those MOUs will crystalize ? Moreover how can we sure that for every $5 billion exported $1 billion is not being deposited abroad and not coming back into the system ?
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M M Alam Nov 01, 2023 08:10am
As on October 26, 2023 the exchange rate was Rs 280. This means that this rate has taken into account all the factors referred to in the diagram. As on January 3, 2023 the exchange rate was Rs 227. This means that this rate had taken into account all the factors referred to in the diagram of that date. Diagrams keep changing , rates keep changing.
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Ashfaq Ahmed Nov 01, 2023 08:45am
Assumptions assumptions and assumptions, this article will make or break your reputation. We are no longer getting 100 billion dollars, so it’s safe to say we are heading to 300+.
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hydro Nov 01, 2023 09:06am
Were you not one of those pseudo-accountant-economists that said “Pakistan has gone bankrupt” in 2021? Did you not say that “Pakistan won’t be able to avoid default in 2024” just a few months ago? It’s you who’s gone bankrupt from the looks of it, because this article reeks of desperation to get back into power by appeasing the right people.
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Awami Nov 01, 2023 10:33am
Auther explained what is invoicing for understanding with very clear and concise example.
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Nasir Nov 01, 2023 11:40am
The $10b gap can be further minimizes by regulating Afghan Trade. Out exporters (mainly Afghans) exports goods to Afghanistan and claim Export Rebate but not even a single dollar comes to Pakistan from Afghanistan. The dollars required are locally purchased and deposited in bank accounts against the exports. Furthermore, the goods imported for Afghanistan are also financed through Pakistani market and are smuggled back to Pakistan which are destroying the local industry.
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Abdul Sheikh Nov 01, 2023 12:05pm
What about the free money in billions Pakistan received from American which has dried up.
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MUHAMMAD UMER Nov 01, 2023 03:26pm
مسٹر زیدی May Allah destroy all your ambitions and save Pakistan from all kinds of troubles at every moment, no kind words are expected from you.
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faisal Nov 01, 2023 04:44pm
Everything aside you are not taking our greed in account. People that got benefit due to devaluation and profits due to increate in prices will not let dollar go back. Inflation is now priced in every sector.
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Tahir Nov 01, 2023 05:23pm
Agreed with Shabbar Zaidi's analysis based on his deep foresight and knowledge of the field. He was a great FBR chief.
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Az_Iz Nov 01, 2023 08:53pm
Part of the reason why the rupee gained is due to crackdown by the present government. After the elections, once the luteras return, does not matter which ones, once again the slide will continue. Mil baat ke lootengay Aur khayengay sab.
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Az_Iz Nov 01, 2023 08:53pm
Part of the reason why the rupee gained is due to crackdown by the present government. After the elections, once the luteras return, does not matter which ones, once again the slide will continue. Mil baat ke lootengay Aur khayengay sab.
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Sohail Nov 01, 2023 11:19pm
We will do a variance analysis in 2024.
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Kureshi Nov 02, 2023 10:17am
Agreed, very good analysis. corrective measures alongwith strict actions are necessary to control the dollar rate. People may be encouraged to keep dollars in bank accounts. Storing dollars in lockers may be disallowed.
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TAYYAB AHMED Nov 02, 2023 12:58pm
All subsides have been taken from exporter , Exporter electric unit has increased from 23 to 55 , increase in fuel prices have already increased cost of production and sudden fall of dollar to pkr has inccured a huge loss to exporter whose payments were pending. moreover exporter is very demotivated but still hope for best but it is really difficult to achieve the target. my forecast for dollar is 340+ in JAN 2024
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