ISLAMABAD, 26 August — Is the forex market in Pakistan shrinking? Will the demand for hard currencies go down drastically in the days to come? Official and kerb market indications seem to confirm this view. But, how far the market will shrink? It is difficult to quantify for the moment. "It can be very substantial," according to kerb market operators.
But, the actual size of the market will also depend on a host of other elements including the volume of imports and the unofficial trade or smuggling. The state of the economy, the political uncertainty or stability to which flight of capital is linked, and the spread and the profit margin in holding or disinvesting a certain currency, including the greenbacks and the euro, will also be the determining factors.
One major shrinking of the demand for dollars, alone, is expected to emanate from the decision of the central bank, State Bank of Pakistan (SBP) to stop buying greenbacks from the interbank and the kerb market. That include the offshore kerb market. But, it only covers the official and state-operated trade in currencies. SBP admits, it purchased $7.7 billion from the interbank and the offshore and kerb market over the last three years alone. It included $5.2 billion purchases from money changers, and $2.5 billion from the interbank market, virtually the "official" market. It works out to more than $2.5 billion a year. That demand, at least officially is going to disappear, in case the government of Pakistan and the SBP stick to their promises and pledges not to buy forex from the kerb and the interbank markets.
Dr. Ishrat Hussain, governor, SBP, strongly defends the central bank’s past purchases from the kerb, however. He says, "these purchases helped us avoiding new short-term commercial loans, and saving $400 million a year in the shape of future debt servicing liability that would have been forced upon us." Hussain also maintains, the increased forex " reserves were used as a tool of exchange rate and monetary policy management.
SBP used the interbank market to effect monetary policy, either supplying domestic currency to the market or buying it against foreign currencies. The objective of a stable, realistic rate that does not erode the competitiveness of exports can only be achieved through adequate reserve accumulation, in turn helping the SBP to intervene at times to maintain this stability." SBP used the forex level also as, what Hussain says, " as confidence factor in the perceived risk assessment," because "the cost of debt becomes much higher when the lenders know that the country has no option but to raise new credits to meet its obligations." However, the operation to buy dollars from the market was costly as SBP paid Rs.2 to 3 per dollar more than the ruling interbank rate while buying forex from the kerb. The overall cost of purchases in three years alone was Rs.11.6 billion. That is expensive but still a one-time cost. Purchases were made even earlier, costing extra amount to the national exchequer.
Another help came from expatriate Pakistanis, particularly those working in the Gulf, the Middle East and North America.
They increased their home remittances by more than 120 percent to $2.39 billion during the year ended June 30, 2002, compared to the previous fiscal. The remittances rose mainly because of fear of the US-initiated monitoring of money flows after Sept. 11, forcing ‘hawala’ or ‘hundi’ operations to decline. It also was partly because of nationalistic sentiments as Pakistanis came forward to help their motherland that was facing financial trouble because of the US attack on Afghanistan. Western assistance of more than $1 billion also came handy during that turbulent period. This entire environment, plus international weakening of the greenback, strengthened the rupee. The dollar-rupee parity improved by nearly Rs.4 to a dollar, to a point that SBP had to intervene in order to shore up the dollar so that Pakistani exports do not become too expensive and incompetitive abroad. SBP’s intervention in the past several months has been to maintain the parity at around Rs.60 to a dollar.
The volume transacted, at present, in the kerb market is, however, much more, than the SBP purchases. And, International Financial Institutions and Western governments, particularly US are after this market. There are at least four major reasons for that:
1: the persistent IMF pressure over the SBP and the government of Pakistan to stop buying dollars from the interbank and the open market. The Fund is forcing this point ostensibly to let the Pakistani rupee find its own value and should fluctuate with the dollar according to its demand and supply.
2: To get the Pakistan’s vast kerb market shuttered down and bring an estimated forex trade ranging between $8 billion to $12 billion a year into the mainstream currency operations. The real volume of these transactions not only varies, but the a near-mystery surrounds its overall size.
3: Washington’s agenda, that is being hotly pursued by the Fund, to starve of funds all the globally operating terrorist outfits. These are fed through regular banking channels and via the ‘hawala’ and ‘hundi’ routes.
4: Choking off all routes and sources for money laundering of drugs and illegal weapon-related trade and cash.
Ministry of Finance (MoF) officials said that "the question of SBP’s dollar buying from the open market has just been thoroughly discussed between Finance Minister Shaukat Aziz and SBP Governor Dr. Ishrat Hussain on the one hand and Klaus Enders, leader of the visiting IMF mission." The mission was hear to review the performance of the economy as part of its ongoing assistance program.