ISLAMABAD, 28 May — Pakistan Government and the central bank have allowed Pakistani companies to make equity-based investment abroad. The move aims at attracting a sizable forex inflow in future, but, it has already started straining the exchange rate in the short run.
The latest decision for investment for establishing companies or starting joint ventures abroad was approved by the federal Cabinet, and announced by the State Bank (SB) the central Bank.
Pakistan is particularly eyeing IT companies, banks, financial institutions and consulting firms for investment as these are skill-intensive. Pakistan is quite rich in this category of manpower, and companies but require small capital. The guidelines, SB has laid down for investment, are: “under the new policy, equity investment by tax-paying Pakistani companies will be permitted through interbank foreign exchange or from funds available in the foreign currency accounts of investors held in Pakistan or abroad. All such companies are bound to repatriate to Pakistan, the profits and dividends earned on this investment.
The policy has been enacted to encourage leading Pakistani companies to compete in the international marketplace for the growing opportunities in world trade and technology fields. Such companies can be listed in bourses abroad.
The government hopes that equity investment abroad will, simultaneously create a considerable demand for expertise and manpower including industrial and financial managers, supervisory workers, labor, Pakistan-made equipment and a wide range of services. As far as the mode of investment is concerned, it will be in the form of the interbank rate which is also the official exchange rate for nearly 95 percent of forex transactions.
The US currency, recently, was available in the interbank market at just under Rs.62 to a dollar, while in the kerb, the greenback was selling at close to Rs.65. But, both interbank and the kerb rates for the dollar have gone up, following the SB decision permitting investment in equity abroad. In the first four days, following the announcement, the interbank rate rose to Rs.62.52/62.55, loosing Rs.0.78 or more than 1.3 percent in value to a dollar, while the kerb rate went up to Rs.65.40/65.30. No reversal of the trend is in sight at the week-end.
The rupee has lost 18.3 percent in value since July 20, 2000 when the SB removed its unofficial cap on dollar rates in the interbank market. The kerb rates move around Rs.3 a dollar ahead of the interbank rates. Bankers wondered whether “ a new outflow of forex has started in the wake of the decision on investment abroad,” although it may be too early to reach such a conclusion.
But, one of the immediate reasons for dollar constantly moving up is a month-old decision of the SB banning money changers to take their non-dollar forex to Dubai to convert it into dollars and bring it back to Pakistan for sale in the open market. The money-changers were asked to sell such currency to the state-owned National Bank of Pakistan (NBP) and, in turn, buy dollars from it. But, although money-changers were depositing their non-dollar forex with NBP, the bank gave them no dollars.
However, near the weekend the NBP sold only $2.0 million to the money-changers against their deposits of non-dollar forex. It eased the market just a bit and dollar receded Rs.0.20. The holding up by NBP had “created an acute shortage of dollars.” People were buying only dollars. No one was selling”, said Malik Bostan, president, Forex Association of Pakistan (FAP).
The SB action, stopping currency conversion at Dubai, was aimed at preventing smuggling of forex. It thought that 80 percent of forex taken out to Dubai for conversion is never brought back to Pakistan in the shape of dollars. Bankers and kerb market operators are of the view that the SB ban on conversion in Dubai has, rather than curbing, boosted channeling of expatriates’ home remittances to Pakistan though ‘hawala’ or ‘hundi.’ That is what the government is striving hard to discourage.
The other factors, pushing the dollar up, are sizable Greenback purchases by banks for their clients to repay corporate debts abroad, importers booking forex for payments, and the government that has foreign debt repayments of around $600 million due in the next month or so. Foreign portfolio investors were also in the market for dollars to repatriate their disinvested stocks.
SB, meanwhile, has not intervened in the market to shore up the sagging rupee, nor has it purchased dollars in the kerb since March this year, under the IMF advice which wanted Pakistan to adopt a market-based exchange rate.
However, bankers and money market sources feel that rather than a direct intervention in the forex market, the SB may increase the Treasury bills (T-bills) rates to absorb liquidity, reducing availability of the rupee, thereby, dampen the enthusiasm to buy and hold dollars, and help the rupee.
But, will SB raise the interest rate to stabilize the rupee? Dr. Mushtaq A. Khan, SB’s economic advisor, says, “the gradual loss in the rupee value does not call for a heavy handed monetary management.” The rupee value had gone through a virtual free fall in October, 2000 leading SB on Oct. 4, to raise the repo and discount rate by 1 percent, while T-bill rates of various maturity were upped by 2 percent. But, even those actions did not stabilize the rupee.
It will be against the interest of the economy, especially because of the drought and poor performance of the farm sector, to further tighten the money policy. The present situation, in fact, calls for a loosening up of the money policy. At the same time, the government and SB wish to prevent dollarization of the economy, to stem the dollar-buying spree by the people and the corporate sector who re trying to hedge themselves against likely losses due to the falling rupee.
The Ministry of Finance (MoF) claims that the benefits of the new investment plan will “outweigh the forex cost that will be initially incurred on investment abroad.” The forex required for such investment will be small and Pakistani companies that will establish joint ventures in the Middle East, Africa, and the Central Asian Republics will bring back considerable dividends, besides providing employment to skilled Pakistani manpower.
The critics, on the other hand, say that in the name of investment overseas, one more, and this time legal, channel will be opened for flight of capital abroad.
