KARACHI: Pakistan’s currency is expected to remain stable against the U.S. dollar throughout this year owing to the central bank’s prudent management, but anaemic external position due to weak inflows and sluggish exports poses serious risks to the rupee’s stability, analysts said on Tuesday.
The analysts said the central bank’s deliberate attempt to keep rupee stable has played off considerably well up till now, even though falling exports and dip in foreign direct investment weakened the balance of payment position.
The State Bank of Pakistan (SBP) raised cash margins on certain imports in addition to ask banks to fund their tier-two capital through foreign currency loans. The central bank is also encouraging investors to arrange project financing outside Pakistan. The cash margin on import of certain consumer items aimed at to curtail the alarmingly wide trade deficit.
The rupee stayed flat at an average of 104 versus a dollar in the interbank market since December 2015. “We think USD-PKR stability is likely to continue in 2017,” said Bilal Khan, a senior economist at Standard Chartered Bank, “however, if coalition support fund receipts from the US do not materialise this fiscal year and exports remain muted, the current account deficit may exceed our $6.7 billion forecast.”
The country’s current account deficit almost doubled to $4.716 billion in the seven-month period of the current fiscal year of 2016/17 from $2.479 billion a year earlier. “Until the foreign direct investment and exports improve, the foreign exchange reserve will slowly deteriorate and push rupee to fall in the third or fourth quarter of this calendar year,” Khan said. The country’s forex reserves fell to $21.822 billion as of February 24.
A banker said the country is also expecting inflows after the inclusion in the Morgan Stanley Capital International Emerging Markets Index in May 2017, which would attract foreign direct investment of $300 to $500 million within one year after the inclusion. “(But), in the coming days any political turmoil and panama crisis might dent the stability situation of our currency,” he warned.
However, some analysts still believe that the rupee is overvalued. They expressed concerns over the central bank’s intervention. They said instead of devaluing the currency the SBP is adopting the administrative measures to curb the currency pressure.
A banker said the rupee depreciation would drastically increase the interest payments on foreign debt, pushing the current account deficit to the new highs.
“Any depreciation in the local currency will send inflation higher, which will require active management through increasing interest rates and administrative measures thereby stalling growth,” said Faisal Mamsa, a currency analyst at Landmark Capital.
“Measures like increasing cash margin on imported goods are credible as they escape the standard operating procedures of the World Trade Organisation but they have to be coupled with efficient administrative measures to curb smuggling.”
Analysts further said the currency devaluation will not squeeze pressure on the balance of payments. “Pakistan’s best chances of managing this situation is by focusing on supply-side policies for exports and industrial efficiencies, though it will take a long time to make an impact,” said Eman Khan, an analyst at Tresmark Research.
“Other measures include a proactive investment plan for attracting foreign direct investment, something India has done admirably through various non-resident Indian schemes and foreign currency debt pools for the corporate sector.”
Khan added that the financial managers also need to devise a strategy to leverage the China-Pakistan Economic Corridor initiative, “otherwise we will have an incremental GDP growth for 5 to 10 years and then the outflows will start.”
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