Studies, analyses, projections and estimations of exchange rates for any currency constitute the job of economists. They are trained and qualified people insofar as these subjects are concerned.
Accountants, who are primarily technicians, are not sufficiently qualified to comment on these matters with any degree of authority.
The author is mindful of his limitations but he seeks to offer his own perspective on this matter. Recently, the author came across an article by a renowned economist of Pakistan wherein, based on certain workings, the latter’s university has projected that one USD will be equal to Rs340 plus in 2024.
Fully conscious of the fact that the author has no right or competence to dispute that working/presumption; an attempt is being made to present another perspective based on the aberrations that exist in the markets and regulations that define the operating ground realities in the country.
Economic projections and their consequences as worked out by the academia are based on data published by the government. In Pakistan, there are certain external factors that disturb all academic calculations.
For example, the author, in his recent article carried by this newspaper, explained the inflows and outflows of foreign exchange to finance Afghan transit and other trade, which drains out $ 5 billion to $7.5 billion worth of foreign exchange of the country.
All these aberrations and their effects are therefore essential to be taken into account for projecting the future exchange rate.
Recently, at a meeting of the Senate Standing Committee, the Chairman of the Federal Board of Revenue (FBR), disclosed that there is a difference of around $ 4 billion to $6 billion in the import trade of Pakistan, especially with China.
This therefore means that if only these two instances are added, then over $ 13 (7+6) billion worth of transactions within the Pakistan economy are outside the official or documented system and are therefore not reflected in the official data.
Furthermore, due to our inaccurate forex operations, abuse of the system by exchange companies and prevalence of Hundi/Hawala, such transactions affect the actual exchange rate. These matters are not taken into consideration by academics for some valid reasons
If the official imports are taken at $ 70 billion then it means that 18% of this amount is to be added to determine the actual dollar requirements. This partly explains the volatility and unpredictability of the PkR exchange rate.
The author wonders about the validity of exchange rate projections that do not take into account these apparent aberrations floating on the surface.
It is, however, regrettable that our academics are completely divorced from real economics which is taking place on a daily basis in Raja Bazaar of Rawalpindi, Shah Aalmi of Lahore and Jodia Bazaar of Karachi.
If so, then their projections and predictions may be correct but for academic purposes only. That is why perhaps many of our economists are not taken seriously by businesses. A very large number of our experts live around our centres of power. This needs to be corrected.
During the last thirty days or so, the USD declined from Rs 343 to around Rs 280 without any significant change in the country’s macroeconomic fundamentals.
The only apparent reason for improvement in the PkR-$ parity was the action against abuse of forex regime by certain exchange companies combined with ban and duties on Afghan trade. This is only one of the corrections.
The author has tried to simplify the Forex scene in the market through a diagram which is effectively based on figures for 2023-24. This diagram is an oversimplification of a very complex issue; therefore, technical terms have been avoided.
Interbank rates are the outcome of the market depicted in relation to State Bank of Pakistan whereas open market rates take into account the results after taking into consideration the proper and improper role of exchange companies and hawala transactions.
Pakistan has messed up the Forex regulations in a manner that not only open market rate and interbank rate are indirectly integrated but effects of hawala rate are also factored in. This is the economic tragedy of Pakistan. This interaction includes intervention by the State Bank of Pakistan in the market. This article is not about that system; it is only about the future projected rate for 2024.
The official inflows and outflows are known to everybody. This article therefore stresses on unofficial transactions and their effects on the ultimate rate in the open market. As per a conservative estimate (using 2022 as base), the unofficial outflow is around $ 16 billion, which is composed of (a) Afghan requirements of $ 5 billion to $ 7 billion, (b) under-invoicing of $ 4 billion to $6 billion and (c) outflows out of corruption money parked outside Pakistan of around $ 2 billion to $3 billion.
This means that Pakistan needs an additional $ 16 billion over and above the actual requirements as shown by the State Bank of Pakistan and the IMF (International Monetary Fund) projections every year. How these transactions take place is described asunder:
Pakistani importer buys spare parts of cars from China for $ 2 whereas the same is invoiced at $ 1. So $ 1 is paid through the State Bank of Pakistan. The remaining $1 is paid by the Pakistani importer by having the transaction settled by a remittance from Dubai to Shenzhen. This we proudly call ‘Business in Dubai’ when we meet such people socially in Karachi and Lahore.
(To be continued tomorrow)
Copyright Business Recorder, 2023
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