The currency movement is the talk of the town! The rupee dollar parity fluctuated recently in the open market is jolting the confidence of small and medium businesses who are now questioning the continuity of economic growth. Concurrently, Moodys’ outlook on external vulnerabilities is changing the mood to gloom.
Let’s delve into the reasons behind the sudden jump in the spread between curb market and open market; and then link it to the fundamentals behind rating agency’s apprehensions.
The movement in open market is probably nothing but manipulative tactics to have the liberty to import dollars against export of foreign currency without documenting into the formal banking system. The currency dealers usually export currencies that are less in demand and in turn, import the high demand USD. Years ago, the import was routed through banking channels which was changed couple of years ago to let them import all the cash in curb market.
Last week, SBP altered the procedure and allowed only 35 percent of import of cash dollar against permissible export while the rest could come through banking channels. The exchange companies did not like the move as the declaration of currency going in and out would have been more transparent. The gap between the interbank market and open market started to move up and rupee was trading around 113 against the greenback in open market.
If Dar were in power right now, he would have called the exchange companies to reverse the trend by threatening them. But now the power of finance ministry is not there to let things happen at whims. Hence, the SBP seeing panic brewing reverted the decision and once again allowed 100 percent dollar imports against permissible export of currencies in cash.
The foreign exchange companies ensured central bank authorities that the currency rate would revert in two days. That is the fate of thinly traded market. In interbank, the SBP decided parity and fill in the supply gap. On the flipside, in open market a handful of exchange companies can maneuver the rates at will. Now comes the Moody’s report based on real fundamentals which are showing that external imbalances are getting out of hand. Enough has been written on the subject in this column; BR Research welcomed the recent 5 percent currency depreciation, and is of the view to wait for a couple of months to see the impact.
The round of depreciation took place in the second week of Dec 2017 and would reveal its full impact in Jan-18 numbers that are going to be published in Feb-18. Hence, there should be no movement in currency by then. The biggest benefits of currency depreciation could be a boost to exports while parallel efforts are seen to curb the imports.
One policy measure SBP should use to curtail imported demand is to start jacking up interest rates. The policy review is due end of January and seeing the secondary market yields of government papers, the market expects a 25-50 basis points increase in the discount rate.
The policy mix would be fine unless the oil price moves south. Yes, the elephant in the room is oil prices which have been rising in this fiscal year so far. The forecast of oil prices remain as uncertain as the life of a human being, but the outlook is north
Brent was yesterday trading at $69 per barrel and a few expect it to come back and settle at around $55-60 per barrel. On the flipside, some are anticipating it to move up in the band of $70-80. The high price scenario is serious, and it could wash out the economic gains in Pakistan like a Tsunami. The timings could not be worse as the balance of payment worries are already high with elections around the corner and the government may not like to pass on the impact to consumers if the prices move up.
This could be similar to what happened in 2008. Is this one of the reasons why the PML-N has been making trips to Saudi Arabia? In a recent interview with BR Research Minister of State for Finance Rana Afzal said deferred oil payment from Saudi Arabia is in fact one of the options on the table. If oil moves sharply north, that option will likely be exercised. And with it perhaps a change in foreign policy?
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