ISLAMABAD, 20 October 2003 — Is dollar diving? Will it adversely affect Pakistani expatriates sending money home?
The kerb does not hope it will. In fact, the kerb market may start growing, once again. But, the State Bank of Pakistan (SBP) remains on its toes. Why? Reflecting the government wishes it continues to endeavor to enlarge the inflow of home remittances to strength its forex reserves and the external sector. It should, for this reason, see expatriate dollars getting as much in exchange as they reasonably can. But contrary to these wishes, it also has to keep the rupee at a level field. This is in order to keep Pakistani exports competitive.
The dollar has been slipping down against the rupee over the last two weeks. It means a decline in the dollar-rupee parity. The decline of the greenback is attributable to two elements. One is its fall in the global currency markets. The other, perhaps, weightier than that is the dollar’s supply-n-demand in the Pakistani market. This second equation is determined, principally by three elements: The inflow of home remittances from expatriate Pakistanis working in the Gulf and North America, the demand in the domestic Pakistani market, and the outflow of Pakistani exports — including their volume and the unit prices they fetch in the global market.
The dollar rate in January 2002 was Rs.60 and a year later, declined to Rs.58.18 in January 2003.
In contrast with the travails of the greenback, euro has been on the rise in the Pakistani market. It went up from Rs.52.16 in January 2000 to Rs.53.68 in January 2002, and further to Rs.60.67 in January this year. It was trading at Rs.67.20/66.90 in mid-October. It has a firm and rising demand. However, all these four factors are outside the control and ambit of the SBP or the government of Pakistan.
The rate of exchange is determined largely by domestic and external market forces. SPB, however, has a modifying role inasmuch as it can go into the open market to buy and sell dollars. Its objective is not to let dollar become too expensive that will hit Pakistani importers and government’s repayment of foreign debts. On the other hand, the second part of its mandate is not to let rupee go too high as it will make exports expensive and incompetitive globally. The government has set a record $12.1 billion export target for the current fiscal 2004. It wants to achieve it deploying all possible means. Exports in the first quarter — July to September — of fiscal 2004 rose 14.65 percent to $2.967 billion compared to the like quarter of fiscal 2003. The first quarter imports rose 11.84 percent to $3.105 billion. It narrowed the trade gap to $137.99 million. The gap, compared to the first quarter of 2003 was 26.75 percent less.
Previously, for months, SPB was buying dollars in the kerb, including the offshore money changers in the Gulf and elsewhere. It meant a strong SBP and private demand for greenback, that affected the dollar-rupee parity. The greenback rose, forcing depreciation of the rupee. it also meant a big spread between the buy and sell rates of the kerb and the interbank market. But, by June last, the equation was reversed and for some weeks, one was able to encash dollars in the interbank market at a rate higher than the kerb. Now, once again, things have taken a 360 degree turn. But, the spread between the by-n- sell rates in the interbank and kerb markets has narrowed down. At a time, when SBP was buying dollars in the kerb, it was objected too by IMF. Ostensibly, SBP quit buying from the kerb on IMF urging.
Malik Bostan, president of Forex Association of Pakistan (FAP), the group that represent 368 officially licensed money changers, says, “out of the total current official forex reserves of $11.4 billion, almost $8.0 billion were contributed by money changers.” “The licensed money changers, are contributing positively toward the stability of the forex regime. If 368 legal money changers are not allowed to continue forex business, then 300 unlicensed and illegal money changers will fill in the vacuum,” Bostan told the SBP.
The kerb market analysts are also of the view that eliminating the role of licensed or unlicensed money changers from the scene will also influence the dollar- rupee parity and the quantum of inflows. SBP’s plan to convert money changing to forex exchange companies by June 30, 2004 is to eliminate their malpractices, including the alleged flight of capital.
The interbank market confirms, the demand for greenbacks has been small in recent weeks, compared to September or before. With no intervention by SBP, at a time of low demand, the dollar value has been pruned somewhat. Dollar has lost Rs.0.40 since July 1. Just before that, in late June, it was trading in Rs.57.85-57.80 band.
The central bank officials don’t reckon as yet, as to if and when SBP will intervene in the market, so that the greenback-rupee parity does not change to the disadvantage of exporters. But, analysts are of the view that SBP could start defending the dollar if and when it declines to around Rs.57.40. Close to that — Rs.57.44 — was the rate dollar was selling three years ago, in September 2000. The same rate was being quoted on Oct. 10. The kerb market, however, is expecting the rupee to stay firm against the dollar in the coming weeks.
As of this week dollar was quoted at Rs.57.59/57.41. The kerb rate is Rs.57.85./57.75.
The spread between the interbank and kerb is growing. It is likely to encourage remittances through ‘hawala’ or ‘hundi’, according to market sources, if the interbank rate does not move up. The interbank and kerb market spread was between Rs.0.40 and Rs.0.27 in the past few weeks, when the open market was offering a better exchange rate for the dollar. The narrowing down of the spread between the two markets is likely to improve expat dollar inflow through the official banking channels rather than through ‘hawala’ or ‘hundi,’ the SBO officials had hoped. But, it is not happening.