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Pak central bank cautions on risks to external balances, rupee value

The warning is included in the Monetary Policy Statement, or MPS, for February and March, just unveiled by State Bank of Pakistan, or SBP, the central bank.

In the Inter Bank market dollar was trading at Rs90.68/90.72, at the weekend, after a slight improvement from the previous low of Rs90.81. In the kerb it was trading at Rs90.60/90.95. The improvement followed larger dollar supply in the market.

The bank, however, retained the benchmark Discount Rate (DR) or policy rate — which forms the basis for commercial banks to determine their own lending rates in the country — at 12 per cent. SBP decided to continue the DR at 12 per cent due to ‘concerns about a further rise in inflation in the coming months’ on the back of ‘substantial government borrowing to fill the growing budgetary deficit.’

Average inflation in the current 2012 which ends June 30 is estimated by SBP in the range of 11-12 per cent. The projection is disputed by independent economists and analysts who consider it to rise further in view of the growing government borrowing from the SBP and the commercial banks.

The government has, so far, borrowed Rs444 billion from the banking system, while it is still more than four months to the end of fiscal year-2012.

SBP Governor Yaseen Anwar, said: “Pressure on the rupee liquidity is likely to continue due to uncertain foreign inflows and substantial government borrowing to finance the fiscal deficit.”

At the same time, “inflationary pressures have not eased significantly,” he said. The rupee has already depreciated 5.2 per cent against the dollar since July 1, 2011.

The overall rupee deprecation against the dollar has been close to 48 per cent over the last four years when the present government of Pakistan Peoples Party (PPP) came into power.

Rising international oil and commodity prices, coupled with the financial crisis and economic slowdown in US and EU have also stagnated Pakistani exports to these two biggest trading partners.

SBP has also cautioned the government over a draw-down of forex reserves. The forex reserves have already depleted to $12.2 billion, as on February 9, from $14.8 billion at the end of June, 2012 when fiscal year-2011 had ended.

The central bank is of the view, the real challenge, facing the government is to finance the projected external account deficit. Incorporating a steady inflow of overseas Pakistani workers’ home remittances, the external account deficit will be in a range of $3.5-5.5 billion.

But in this less than rosy scenario, something stands out. overseas pakistanis, including those working in GCC, US and UK are, once again, sending more home remittances.

They have sent home more than $7.5 billion over the last seven months of the current fiscal year-2012.

The year is expected to close with a total record inflow of more than $12 billion.In order to resume a sustainable economic recovery over the medium term, SBP has strongly recommended a sizeable increase in the domestic and foreign direct private investment, or FDI.

The balance of payments, or BOP, is likely to stay under strain during the coming months.

It effects both the external accounts, as well as value of the rupee. Islamabad is committed to pay $2.5 billion this year. It is an unhappy sign for the forex reserves which have begun to decline, and is negatively affecting the value of the rupee.

In order to strengthen the forex reserves and stop rupee value depreciating, there is an immediate need to fortify the external accounts.

According to the latest data the capital and financial inflows during the first half of fiscal year -2012, were just $167 million, on the back of a decline in the FDI and portfolio investment. The situation worsened because of shortfalls in the official aid inflows.

The SBP in its Monetary Policy Statement says: “assuming that all the official flows contemplated by the government of Pakistan are realised –the net capital and financial inflows can riseto $3.8 billion by June, 2012.”

The analysis also takes note of the rising international oil prices as a threat which can further eat into value of the rupee.

It is not up to the government of Pakistan and the central bank, in collaboration with the private sector, to take effective steps to stem the depreciation and bolster external accounts and balances. Will the present government find time out of its domestic political squabbling — and tensions with US over war on terror — to do it?

Views expressed by the author are his own and do not reflect the newspaper’s policy