ISLAMABAD, 6 August —Will the Pakistani central bank continue to buy dollars from the kerb? All indications are that it will. But, this has a plus point, and a negative one.
The plus is that the State Bank (SB), Pakistani central bank, is reducing the country’s forex liability by repaying external debts — although at a comparatively high cost. The negative point is that a large-scale buying from the open market is pushing the price of the dollar higher and higher — or leading the rupee to depreciate at a faster rate.
The depreciation of the rupee has been close to 21 percent over the last one year — from July 2000 to July 2001. The depreciation since May 1998 — the day of the nuclear explosions and start up of the present and continuing series of forex-related problems — has been close to 41 percent. Barring occasional resistance the rupee is still declining. The resistance has been short-lived, lasting a few days at a time. But, the decline generally continues when genuine or contrived shortage of the greenbacks takes place, or some other bad news hits the economic horizon.
Between May 28, 1998 — the day foreign currency accounts (FCAs), owned by private citizens were frozen — and May 1999, the government’s whims determined the domestic value of the rupee against the dollar and other foreign currencies. But, the people and the businesses suffered as a result of a mindless exchange rate policy which was more of a non-policy. Then the dollar was capped in May 1999, which the SB itself and analysts say was “artificial.” That created a black market and a gray-market with different rates for the dollar, changing almost daily. This artificial cap was removed on July 21, 2000, because the reality of the rupee value was different and it was declining. The IMF also pushed the SB and the government to let the market determine value of the rupee.
The rupee has been on the slide down from that day, even though both Finance Minister Shaukat Aziz and Dr. Ishrat Hussain, governor State Bank, now say “the rupee is under valued.”
Dollar, this week, was selling close to Rs.67.50 before easing a bit, in the kerb. The interbank rate was ruling at plus Rs.64.50. In view of this, what is the real value of the rupee?
Why is it being kept undervalued? Who is keeping it undervalued?
These are the questions they, and other big-wigs in the government should answer for our benefit.
The SB has been, originally, shy in confessing that it is buying dollars from the kerb to meet the state needs, repay the outstanding foreign loans, or pay essential import bills, few of which still had a claim on the official foreign exchange reserves, while more than 95 percent of forex expenses had been shifted to the interbank market or straight to the kerb. Over the last two years, SB has purchased, at an average, $ 325 million a month from the kerb, or a total of $ 7.8 billion. If the open-market buying goes on at that scale, what will happen to the value of the rupee — ever on the roller-coaster? During the same period, Pakistan got repayment of its $2.8 billion debts rescheduled.
It means, SB’s annual purchases were nearly half of the country’s export earnings. The exports have been annually hovering around $8 billion a year, although they moved a bit beyond $9 billion in fiscal 2001, as officially claimed.
The economic reality of any nation cannot be kept under wraps for a long time. This particularly is true of Pakistan and its weak fundamentals in a number of fields. These are not of the making of any particular government or a specific class of people, and no one should hide such facts for fear of being singled out for a blame.
I will call Dr. Ishrat Hussain to be a realist and the one who believes in being candid and transparent. The quarterly SB reports on the state of the economy that have vastly improved since his induction in office, and several other measures taken during his term go on to prove it. The forex handling is one of them. He cannot print greenbacks, and the country’s exports, business and industry are slow to earn much more and fill all the existing — and growing — forex needs of the country.
Dr. Hussain has very clear views on the SB buying dollars from the kerb, and now makes no bones about it. In the defense of his policy, he says, “the SB’s policy of acquiring dollars from the open market has helped Pakistan repay its liabilities of $7.8 billion to the foreign lenders in the last two years and prevented the possible default, and maintain its foreign debt at the level of $ 38 billion. Pakistan would not have been current on its foreign payments and its debt could have gone up to $41.5 billion, had the bank not purchased dollars from the open market. The bank has been reducing the country’s foreign liabilities, instead of adding to them by fresh borrowings,” he said at the Lahore Stock Exchange.
The SB’s logic to continue buying from the kerb is that if it had to borrow the required amount, it would have to pay $350 million annually in interest on the new loans, because the interest rate is between four to 5 percent above LIBOR (London inter-bank offered rate). Whereas by buying from the open market, it has no principal or interest on new loans to repay. But the operation has not been cost-free. The SB paid upto Rs.2 to 2.5 premium for each dollar it purchased from the kerb, Dr. Hussain says. The total cost to purchase $7.8 billion was around Rs.17.55 billion.
What payments were made out of the dollars purchased from the open market? There are reports and allegations that the money was also used to repatriate profits of multinationals including food chains and ‘burgar-wallahs,’ that led the rupee to depreciate. But, Dr. Hussain denies it.
He substantiates his claim by pointing out that the total amount of profits, repatriated by all the multinationals during this period, was $400 million.
Will the pressure on the rupee ease? Will its depreciation cease — some day? It does not look likely in the foreseeable future. The reason: The country requires $7 billion a year to remain current on repayment of its foreign liabilities and loans. While Pakistan, for years, earned from exports less than what it needed to pay for its imports, plus the repayment of the old, outstanding debts. It meant low forex reserves. It, in turn created a balance of payments gap, that had to be filled by buying dollars or getting the loans rescheduled. The forex reserves at the moment, according SB are $ 3.2 billion. Half of this amount is the official reserve, while the other half is the amount of placements, the commercial banks have made with the SB, out of the private foreign currency deposits of people.
