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Energy and politics take their toll on forex

AS ENERGY crisis and political uncertainty persist, depleting forex reserves and deteriorating external balances are taking their toll on rupee's value and the economy.

The forex reserves declined to $10.158 billion on August 2, from $10.487 billion on July 26. The amount includes the official reserves as well as those held by the commercil banks. State Bank of Pakistan (SBP), the central bank, reported that its official reserves declined to $6.968 billion, down $48 million. But the forex held by commercial banks rose $151 million to $3.190 billion.

The declining forex reserves are putting pressure on the value of the Pakistani rupee in its parity against the dollar and other hard currencies. At the same time, no major foreign currency inflows are actually coming in or are in sight. The rupee depreciated 17 per cent against the dollar in seven months since January 1. Its still sliding.

During the week-ended on August 9, the buying rate for the dollar in the inter-bank market was Rs72.78, and Rs72.89 for selling. In the open market, the buying rate for dollar was 73.10 and Rs73.30 for selling.

The rupee sank rapidly until August 13, and trend hardly showed any reversal. In the inter bank market the buying rate for the dollar was Rs75.20, and selling Rs75.05. In the open market buying was Rs75.50, and selling Rs76.10. Dollar traded , at one time, up to Rs76.50-76.80 on August 15.

In fact SBP has provided no details of the actual, or estimated, forward foreign liabilities which will be yet another source of pressure on reserves and by the same token, on value of the declining rupee.

The froex reserves were at an all-time high of $16.486 billion on October 31, 2007. The combined official and commercial bank reserves were still quite good on February 15, 2008, at $14.08 billion, but a process of fast deletion had already set in - coinciding with rising prices of imported oil and other commodities.

The tables have been turned over the last 10 months, with prices of imported oil, food, commodities, and industrial inputs continuing to skyrocket. The country's foreign debt servicing liabilities are rising, too. The current account deficit (CAD) widened to $14.44 billion at end-June 2008 that calculates to 8.0 per cent of GDP.

Concerns have started growing further even at this early stage of fiscal 2009 which is just one month into the new year. Businessmen, industrialists, exporters, and economists are waiting and hoping for a miracle to happen to stem the tide of red flowing into the economy's vital signs.

The foreign trade news for July - the first month of fiscal 2009, is depressing. July ran a $1.64 billion trade deficit - 49.19 per cent wider than the like month of last fiscal, when it was $1.10 billion according to the government's Federal Bureau of Statistics (FBS). Imports this July were $3.55 billion and exports $1.91 billion. Comparatively, imports in July 2007 were $2.57 billion and exports $1.47 billion.

The Foreign Trade Policy-2009 announced last month sets export target for the current fiscal at $22.1 billion, compared to the actual exports of $19.22 billion in 2008.

No import projection for the year has been made, because no one can say for sure how high oil, food, commodity, and industrial input prices will be. But the Ministry of Commerce are expecting imports for the fiscal to total $37.0 billion, barring still more negative factorsin terms of import value and quantum. That may leave Pakistan with a $15 billion trade deficit. This is notwithstanding the government's vows to restrain import growth from the 2008 level of $39.9 billion level. The 2008 trade deficit was a record $20.68 billion. However, business and independent economists are keeping their fingers crossed.

Besides the widening trade deficit, increasing debt repayments are also adversely impacting the external balances. Debt serving in fiscal 2008 rose to $3.029 billion, according to SBP. It is likely to cost still more from this fiscal. The multi-lateral and bilateral aid donors which are members of the World Bank sponsored Paris Club had rescheduled their loans to Pakistan in the wake of 9/11 to overcome its financial difficulties. This rescheduling period will end next year. Pakistan still owes the Paris Club $13.928 billion. These repayments are likely to add $1 billion to the current debt servicing on various accounts. Pakistan's overall debt liabilities now are $46.389 billion. It includes $5.808 billion increase in 2008.

Pakistan faced a $5.5 billion external resource gap in 2008 that was filled by drawing down on the reserves that were badly hit. The overall financing gap for 2009 is projected at $16.5 billion. The inflows are estimated at around $10.5 billion, laving almost the same gap as last year.

Some of the inflows are still to be arranged for, because the official reserves are depleted down to a level which is already causing serious concerns. It appears that likely credits from multilateral and bilateral sources are on hold in view of the ongoing political uncertainty and government transition. The donors also are monitoring the key macroeconomic indicatoRsto move before they can commit funds.

Pakistan's fiscal health stays under pressure because, besides other pressing needs to cover the budgetary gap, the government has been borrowing domestically, too.

At end June, 2008, its domestic debt rose to Rs3.21 trillion from Rs2.6 trillion at end-June, 2007, according to SBP.

Prime Minister Yusuf Raza Gilani visited Riyadh in early June, seeking Saudi financial assistance. Riyadh, officials say, has indicated providing up to $5 billion in the form of Saudi Oil Facility (SOF) over a span of five years, but the assistance is still to come. When it does, it can reduce the growing oil import bill to some extent. Oil imports cost Pakistan $11.4 billion in 2008. The oil import bill may rise to $14 billion this year even if the price eases, because the overall demand is increasing, too.

As the resource crunch remains, and in fact, grows, the new government is trying to mobilise domestic revenues in order to cover the budgetary deficit. It is also trying to raise the forex inflows throw foreign trade, and inflows in the form of FDI, home remittances of overseas Pakistanis working abroad, and bilateral and multilateral aid donors. The home remittances from overseas Pakistanis in 2008 were a record $6.4 billion.

The government has allowed two concessions in the new national budget for fiscal 2009. These concessions include declaring untaxed or tax-evaded domestic money and assets by paying two per cent tax and make the amount or the assets legal. This is provided under the Investment Tax Scheme-2008.

The Federal Board of Revenue (FBR) through its Circular No. 8 of 2008 issued on August 8, has also allowed whitening or legalising undisclosed foreign currencies on payment of two per cent tax to the government, also under the same Investment Tax Scheme. It says "cash" mentioned in the original scheme will also include "cash in foreign currency." In order to calculate two per cent tax to be paid to the government, the foreign currency amount will be converted into Pak rupees as on June 30, 2008.

The new government has, first, to stabilise itself in the medium term, politically and economically. It has to correct the downward direction of most macro-economic factors ranging from a declining GDP to spiraling inflation.

"The widening fiscal deficit, spiralling imports and stagnating exports, rush on the forex reserves and the rupee loosing its value against hard currency, fight of capital, and growing domestic and foreign debt.

During this period it should formulate a vision and draw up a strategy to face up to the growing economic problems and domestic factors, adversely impacting the exchange rate and moderate its volatility to begin with. That requires sustained efforts by the government and the private business.