Analysing PKR's parity with USD

ARTICLE: In this writer's post-budget note of June 13, Rs/$ parity was at 164.20. Based on Hammad Azhar's budget speech, this writer had projected a 7% budget deficit for FY21. He had also said Rupee should depreciate between 5% to 7% as the allocated amount is Rs 3.195 trillion.

In last four weeks, in the interbank market, Rupee lost nearly 3.82% of its value, that declining from 160.50 to 166.63. Regional Asian currencies are comparatively strong versus the Pakistan's. Then the big question is: what is causing this slide?

Remittances in other countries of the region have dropped at a faster pace than in Pakistan. PKR saw a minor dip against expectation of a bigger fall predicted by the World Bank and others mainly due to softer oil prices that added pressure on the Gulf oil producing countries to delay their pending projects. Though there are reports of job losses, overseas Pakistanis must be spending less which has also helped.

The Current Account (CA) position is not worrisome as a fall in imports, which was and is more than double the size of exports is a comforting factor.

But exports, despite sharp depreciation of Rupee, have never picked up in the same proportion.

Historical trends of last over 50 years suggest that a weak Rupee has never helped exports rise, although imports have kept on rising to new highs. It is because Pakistan is unable to produce and export high quality finished products. In recent months, Covid-19 has caused further damage to exports.

SBP Governor Dr. Reza Baqir is on record having said that exchange rate reflects demand and supply gap, a point which is well understood.

While the IMF has emphasized time and again that there is no agreed target level for the exchange rate, as the program remained focused on Real Effective Exchange Rate (REER).

The current downside move of PKR is not in line with the above two factors. The demand-supply gap has improved due to a lower import bill, which is partly due to fiscal measures taken to curtail imports and partly due to a plunge in oil prices.

Similarly, REER, which was the whipping boy and everyone blamed the then Finance Minister, Ishaq Dar, for deliberately keeping PKR overvalued is moving in the opposite direction, as it remained above the base, which is 100. REER peak, which was 121.0086 in June 2018 is, now well below the base level since December 2018 and is currently at 94.8143.

Based on above two factors, Pak Rupee should be somewhere around 150 to 155 levels. But nothing is as simple as what is said and is practiced. Such statements are largely fillers.

None of the experts is able to identify the areas and able to tell that why exports in past suffered due to an overvalued Rupee; nor are they telling us the factors behind exports. Yes, Covid-19 is recent phenomenon.

Based on REER, PKR is undervalued for last 18-months, whereas there is no supply-demand issue.

The slowdown in imports is due to a combination of factors, which is surely the outcome of fiscal measures, helped by the FATF factor that saw tax evaders hiding in their den. Softer oil prices are of immense help in reducing the oil import bill.

Despite a slowdown in imports and fiscal measures taken, the cost is in the shape of a rise in external debt that has surged to USD 109.949 billion (March 2020) from USD 95.097 billion or in Rupee terms it is up by Rs 6.5 trillion since August 2018. It is because due to a lack of planning and strategy as 22 months have passed and the economy is still clogged.

However, in order to give you some sense based on statistics, PKR/USD was at 124.0479, on August 19, 2018, Foreign Exchange (Forex) Reserves were at $ 16.713 billion and REER was at 104.6808. As of now PKR/USD is at 166.63, Forex Reserves are at USD 16.920 billion and REER is at 95.7134.

In this writer's view, the recent move could be aimed at bringing the Rupee parity rate in line with its FY end June target (if any). And more importantly, about three weeks ago, there was outflow of nearly USD 1.5 billion; it was short-term borrowing that could not be rolled over upon maturity because as per market practice rollover is done to avoid default.

Nevertheless, it is quite likely that Pakistan will obtain this fund from its 'dear Asian friend' that should ease pressure on its Forex Reserves position.

Rupee may bounce back sharply unless Forex Reserves deteriorate.

However, it is extremely worrisome that the sizes of our annual borrowings and deficit financing have grown to alarming levels, leaving as with not many choices.

Think about this seriously.

(The writer is former Country Treasurer of Chase Manhattan Bank)