ISLAMABAD, 9 September — Several important moves are seen on the Pakistani forex horizon that have the potential of considerable currency transactions, expanding foreign trade, and aiding two-way investment flows.
The economic and financial team, comprising Finance Minister Shaukat Aziz and Dr. Ishrat Hussain, governor State Bank of Pakistan (SBP), the central bank, that is heading these moves is sure, it " will open the economy to the maximum," although work will go on to further remove government controls, in whatever sector they are found.
The most important moves is for the SBP to start forward trading in forex. Undertaking swap operations, providing larger forex funding for foreign trade, and cheaper credit for exports are some of the moves.
As the SBP starts its Swap Desk (SD) the idea is to help banks stay liquid in forex and rupee currency. SBP will buy foreign currencies in spot and sell these in forward. It will also sell foreign currencies in spot and buy these in forward, against Pakistani rupees.
When banks fall short of their forex requirements, SBP sells greenbacks in spot and buys in forward. When the banks have forex surplus to their requirements, SBP buys their dollars in spot and sells these in forward. The effect of such deals is a change in the level of liquidity in rupees. This is because when SBP buys dollars in spot, it injects rupees into the banking system, and in the event of the central bank selling greenbacks, it picks up the rupee liquidity that is in excess of the banks’ requirements. These transactions are taking place in the growing interbank market, that was non-existent three years ago. The interbank market was created in the wake of forex crisis that followed May, 1998 nuclear explosions.
Freezing of $11 billion Foreign Currency Accounts (FCAs), had followed. Resident and non-resident Pakistanis were operating these accounts with commercial banks, that, in turn had placed them with the SBP. Since the SBP and the various government had illegally and unethically consumed the entire amount between 1991 and 1998, the government promulgated, overnight, a law to freeze the FCAs to prevent a run on the banks as they and the SBP failed to honor dollar encashment of the depositors.
But, things have quite a bit changed since then. The country’s forex reserves now stand at $7.54 billion up from $3.2 billion last year. But, the fact also remains, this build up also owes itself partly to one-time US and Western grants that flowed-in following Sept. 11, reduced outflow of debt repayment installment because of reprofiling of Islamabad’s $12 billion official debt, as well as around $2.5 billion that has been placed with the SBP as private dollar deposits of resident and expatriate Pakistanis. Zafar M. Shaikh, SBP’s forex adviser, explaining the Swap Desk operations says "we will use the desk as an effective monetary tool to achieve our monetary objectives. The dollar- rupee swap will enable the SBP to regulate monetary expansion within its established targets. On the other hand, the operation will assist the banks tideover their shortage of liquidity in rupees or dollars, as and when required." Although rupee has already appreciated more than 7.5 percent against the dollar since July 1, 2001, it is still likely to appreciate. Aziz said, "if the SBP stops supporting the dollar by intervening in the market and picking up the greenbacks, the US currency will fall further right away against the rupee." SPB has been intervening in the interbank and offshore kerb market for the last several months to maintain a parity of around Rs.60 to a dollar. Since late August, it let the dollar slide down to Rs.59.50. But it is still sliding down. The objective is not to make Pakistani rupee too strong, as it will make Pakistani exports more expensive in the global market place, giving an advantage to cheaper exports from other, competing, foreign suppliers.
Dollar’s selling rate over the weekend was Rs.59.20, and buying Rs.59.10 in the kerb. In the interbank market dollar was quoted at Rs.59.34/59.31.
SBP, bankers and analysts say, can also use SD to stabilize the exchange rate regime, and regulate the rupee/dollar parity — up or down.
Here is good news for Pakistan’s foreign trading partners, including those who export to this country or import from it.
The SD will enable the banks to sell forward dollars to Pakistani importers and cover them by buying spot dollars against them. The banks will allow Pakistani exporters to discount their export bills, or sell export proceeds in advance, and at the same time, buy dollars in spot.
The improved forex reserves, held by SBP, also have encouraged the central bank look abroad to place part of these funds in strong, high-yield, but quickly repurchaseable securities.
SBP plans to invest part of its official forex reserves in dollars to protect their value and make some profit. The reserves are predominantly in US dollars, but there has been some thinking to invest a part in euros when the single European currency finds its real level in the global market. There was a strong demand from independent economists to convert a substantial part of dollar reserves into euros, only a few weeks ago, when it was shooting up and had left even dollar behind in several markets including Pakistan. But the SBP waited for euro to calm down. Although that pro-euro euphoria is no longer there, but serious consideration is still being given to convert some of the dollars into euros.
SBP recently sent to Dubai, a team of its senior officials, headed by its Deputy Governor Tawfiq A. Hussian, to look into the possibility of placing part of its dollar reserves in internationally available fixed income securities. The team has returned to Karachi after meeting fund managers. The team was mandated to discuss the possibility of placing upto $750 million into fixed income dollar-denominated securities.
The overall improvement in the forex reserves and increased incoming home remittances from expatriates from Gulf, Saudi Arabia, and North America will also help improve FDI and portfolio investment, as well as repatriation of dividends and principal amounts invested in stocks for which free movement was already allowed. But, the present easy forex situation will encourage such investment and business still more.