Real reforms in sight?

The initial signs of real reforms are in sight. This includes crackdown on smuggling of goods and currencies through Afghanistan and Iran borders and reforms of the exchange companies where the franchises are being closed, and banks are opening own exchanging companies (or counters in branches).

These steps are yielding results. However, there are questions on the sustainability of these actions (especially on smuggling), and continuity of reforms – such as privatization of state-owned companies.

The sentiments have marginally improved for the time being. This is reflected in an oversupply of dollars in the interbank market where almost all big exporters have sold significant proceeds for the next 2-3 months in the forward market over just the last four weeks. They think that the currency shall remain stable (or below current levels) in the next 2 months.

Subsequently, exporters and big businesses are expecting the foreign inflows to come from the sale of Reko Diq shares of state-owned interests to Saudi Arabia. They are expecting materialization of privatization to the likes of PIA and PSM, and long-term concession in energy distribution companies. The ball seems to be rolling.

Some of these steps shall materialize, and foreign flows may begin to trickle in the next 2-4 months. That may extend the stabilization till March 2024. However, seeing is believing.

Exporters and importers have seen the crackdown in the short run and are talking a punt on the PKR appreciation and almost fully sold till November. And if they see privatization, they may remain bullish beyond November.

However, there are dark clouds beyond March 2024. No one is clear about the future. The lifeline Pakistan unexpectedly received from the IMF in the shape of the current standby facility is expiring in March. Pakistan has bulky debt repayments (including market debt) in the April-June quarter.

The political scene is hazy too – whether the elections are scheduled but there are questions over the fairness of the process.

That is the stock of the situation. The panic is being managed and the run on the currency is being managed too. Medium to long-run outlook is still hazy. However, the movement in the currency market is genuinely based on flows. Ever since the crackdown started, the interbank market is on over-supply.

Based on the market-based flows – exports, imports, and remittances— the interbank was in surplus of $800-900 million in the last four weeks. Out of it, $200-250 million are being allowed by SBP to start clearing the backlog of pending dividends and royalty payments. The rest $600-$700 million are being sold to SBP, which is using these funds to service external debt.

The flurry of flows in the interbank market has moved currency (PKR/USD) from 307 to 282 in four weeks. The question many ask about the outlook of the currency. The short answer is that this may appreciate a few more percentage points and is likely to stabilize in a narrow band for a few months.

The wise move for SBP is to not allow the currency to appreciate too much. The government’s and other authorities’ desire is to bring the PKR/USD back to 250.

However, that would be an unwise move. Although, there are merits in the argument that the currency valuation should be 250-260 based on real effective exchange rate (REER), and inflation differential from trading partners.

However, fair value is an arbitrary number. The real game is demand and supply. And the demand is being suppressed in Pakistan.

There are administrative controls on imports from July 2022. There is still a backlog of around $1.5 billion dividend and royalty repatriation, and payments to airlines and others. Then the government has about $50 billion to repay in foreign debts in the next three years.

The banks have barely cleared 15-20 percent of pending private flows. Exporters demand undervalued currency to overcome other inefficiencies in the economy. And to control imports, undervaluation is better too, as the country cannot afford to run a current account deficit for the next 2-3 years.

The advice to the SBP and authorities is to not get carried away with this flurry of flows. And for authorities in Islamabad and Pindi to speed up the reform process. It is time to consolidate the gains from last two years of devaluation. The focus should be on not letting the panic reappear. The under- invoicing of imports from China and other countries should stop. The misuse of Afghan transit trade should be ended permanently. There are steps taken in this regard. These should continue.

Copyright Business Recorder, 2023