However, in this circle, there is one loose end, which is the availability of $ in Dubai with the importer as the spare parts have been sold in Pakistani rupee in Pakistan. This means that the importer needs, for example, 1 USD in Dubai whereas he has rupees (more than 250) in Pakistan. This is an unofficial demand for USD.
On the supply side, the sources are (a) proceeds of under-invoiced exports retained in Dubai, (b) remittance handled by Hawala, (c) Afghan legal exports, and (d) trade in goods not allowed to be traded.
USD to PKR forecast for 2024 — I
For example, on the export side if $ 5 worth of goods are exported only $ 4 is billed from Pakistan, leaving $ 1 behind in Dubai with the exporter. $ 1 is available with a Pakistani to be sold or transacted with another Pakistani.
This is the supply side. There are ‘facilitators’ for these transactions, who charge commissions and such transactions take place in billions of dollars. The abusive role of exchange companies is of a conduit.
As on October 26, 2023 the exchange rate was Rs 280. This means that this rate has taken into account all the factors referred to in the diagram. The question under consideration is the identification of the factors that will deteriorate or improve the PKR-USD parity in 2024.
The Economist’s prediction of Rs 343 is primarily based on the fact that Pakistan will not be able to finance the gap of $ 21 billion as is appearing in the diagram on financing. This is effectively $ 13 if it is assumed that out of $ 10 outflow in financing $ 2 billion is interest and $ 8 billion is repayment of loan. There is a lot of weight in the said argument.
As a result of this gap the reserves will erode and the exchange rate will move adversely. This presumption is however based on the primary assertion that Pakistan will not be able to arrange additional loan financing of $ 13 billion in 2024.
The author therefore is of the view that Foreign Direct Investment (FDI) proceeds are not expected to be more than $ 1 to 2 billion. This means that there will be a gap of at least Rs $ 10 billion to be arranged through new loans.
The first question to answer this presumption is to enquire whether or not that eventuality has been taken into account whilst having an exchange rate of Rs 280. The author’s answer is in the affirmative. The future projections of forex requirements have been published in IMF report Table 3a on Page 35. They indicate availability of funds.
The other reason is academic. The REER (Real Effective Exchange Rate) and other indicators reveal that theoretically the exchange rate of Pakistan should not be above Rs 250. There are bases for the same which have taken into account the following factors which affect the exchange rates. These are:
a. Interest and inflation rates
b. Current account deficits
c. Government debt
d. Terms of trade
e. Economic performance
f. Recession
g. Speculation
This discussion is not aimed at examining the aforesaid factors. All these questions are summarised in one sentence: Whether or not Pakistan after taking into account the stringent corrective measures under the Stand-By Arrangement (SBA) is expected to enter into a recovery mode.
The answer will be in the negative; however, keeping in view the fact that the international and local environment, especially the establishment’s focus on economic issues, the gap of $ 13 billion is not very big for the economy of Pakistan.
The author’s assertion for an exchange rate being different from the negative perception by the Economist relates to ‘enforcement’ and ‘corrections’ against the unofficial sector’s demand. In the event Pakistan is able to curtail/contain this $ 16 billion leakage even to the extent of $ 5 billion, the whole scenario will change.
The demand side of undocumented transactions is to be reduced to that extent. The supply side will not correspondingly reduce as exporters and hawala cannot retain $ for a long time outside Pakistan as the profit within is much higher in Pakistan, even after taking the currency risk into consideration. So the supply will remain the same and the demand can be curtailed. This will result in stability in the exchange rate.
The official side is not going to change substantially. There will be a gap of at least $ 10 billion if the oil prices remain at the same level. Thus the only immediate correction Pakistan requires is a scientific approach to the challenges of Afghan trade, under-invoicing and smuggling.
Lastly, the interest shown by US investors in the country, especially in mining, is only symbolic. It is important to note that people in Washington appear to lend a helping hand to their old partner with some caveats, which, in the opinion of the author, are not against the economic interests of the country. Economic interests should override all other considerations, so to speak.
In this situation, if corrective measures continue with enforcement of the writ of the government there is no reason why in 2024 the PKR should not trade at 250-275 against the USD.
(To be continued)
Copyright Business Recorder, 2023
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