“With reserves touching $ 15 billion the upside risks to the USD-PKR are materially lower at the moment we can easily rule out the possibility of a runaway weakness, I believe we can even see an upside” says Priyanka Chakarwarty, FX Strategists at Standard Chartered India.
Some of the main factors for the rupee finding the floor were the IMF program, slowdown in imports, S&P upgrade of the sovereign credit ratings, easing of inflationary pressures, return of portfolio investment to the equities market and record remittances.
THE IMF PROGRAM
“The $ 12 billion arrangement with the IMF has had multiple effects on the rupee situation. The most obvious impact has of course been on the dwindling forex reserves. But another far more important impact has been on the economy by containing the twin deficits through corrective measures” says Sayem Ali of Standard Chartered Pakistan.
In fact it was the IMF’s approval to provide an additional $ 3.2 billion which also triggered an S&P upgrade from CCC+ to B-. This upgrade has caused an improvement in the risk appetite, and the Karachi Stock exchange for the first time in 18 months, saw an inflow of over $ 100 million in the month of September alone. The release of the USD 1.2bn third tranche of the IMF loan, plus a USD 1.2bn increase in Pakistan’s Special Drawing Rights (SDRs), helped to boost FX reserves to USD 14.3bn as of end-August 2009, from USD 6.5bn in October 2008.
“Going forward, we expect the current account deficit to narrow further to USD 8.4bn (4.9% of GDP) in FY10 on weak import demand and robust growth in remittances.” believes Priyanka Chakarwarty.
The current account deficit also improved significantly to USD 8.9bn (5.5% of GDP) in FY09 from USD 13.9bn (8.5% of GDP) in FY08. While the trade deficit narrowed from USD 15bn to USD 12.5bn, net private remittances rose by 20% y/y to a record high of USD 7.8bn. Even though the portfolio outflows negatively impacted the financial account, but official inflows helped to narrow the balance-of-payments deficit.
OIL PAYMENTS:
The year also saw a significant shift in the central bank’s policy towards oil imports payments by moving all payments completely to the interbank market, thus putting the rupee under further pressure.
Starting early in January 2009 the central bank ordered banks to make all purchases of foreign exchange related to furnace oil from the interbank market meanwhile restricting its support to products exclusive of furnace oil.
In July we saw that support further restricted to just crude oil when the SBP ordered all banks to make all purchases of foreign exchange related to diesel and other refined products from the interbank markets as well.
Finally in December the state bank withdrew its support from the crude oil payments as well and ordered the banks to make the crude oil related payments from the interbank market.
THE LOOK AHEAD:
The Pakistani rupee (PKR) has stabilized, depreciating by around 6% in 2009 versus 22% in 2008. External account corrections, combined with record-high remittances from overseas Pakistanis, have helped to keep the PKR broadly stable.
However, the PKR can come under pressure during 2010 because of the rising trend in the commodity prices and exchange rate reforms including shifting crude oil payments to the interbank market.
On the brighter side there is a lot of potential in the already fruitful remittances area according to the Governor SBP Saleem Raza still over 50% of the country’s remittances come in through non formal channels. Some of the seasoned journalists do not completely agree with the governor’s statistics but they do agree that there is a lot of room for increase in workers’ remittances.
PAKISTAN’S FOREX MARKET
Pakistan forex market sees a trade of over $ 8 billion every month the bulk of which is carried out in the interbank market. There are a total of 31 exchange companies authorized by the central bank five of which are subsidiaries of country’s major banking institutions.
Three exchanges are currently on the suspension namely Al Sahara Exchange, Khanani and Kalia and Zarco Exchange due to non compliance and other issues. There are another 30 companies in the B category of exchange companies whose operations are restricted only to the sale and purchase of foreign currencies
All of these companies come under the exchange policy department of the State Bank of Pakistan and are regulated by the Foreign exchange regulations act 1947 (FERA 1947). There is a foreign exchange manual published by the central bank which out lines all the dos and don’ts for the authorized dealers, exchange companies, investors and general public.
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