This is with reference to Business Recorder editorial titled "IMF programme needs tweaking" published on 6th February, 2020. We would like to draw your attention to the three points raised in your editorial that are either factually or conceptually incorrect. These points are:
1. "...however, what was ignored at the time and continues to be ignored to this day is data uploaded on State Bank of Pakistan's (SBP's) website which notes that the rupee had been undervalued since December 2018 and that in March 2019 it was undervalued to the tune of just under 3 percent.
2. "...a decision that would reduce SBP profits thereby putting pressure on the fiscal deficit given that during the first quarter, an unprecedented rise in SBP profits went half way in lowering the budget deficit.
3. "Additionally, the high discount rate has attracted foreign portfolio investment in government securities which are even worse than the then finance minister Ishaq Dar's policy to incur debt equity (sukuk/eurobonds) as the return is more than 6 percent higher while the amortization period is a lot less than the five- and 10-year maturity set by Dar."
SBP's views on these points are as follows:
1. The first statement appears to be referring to data on the nominal/real effective exchange rate (NEER/REER) indices of the Pakistani Rupee available on SBP's website. However, it is factually incorrect and an inaccurate reading of what the data represent. We would like to clarify that this data do not suggest in any way an undervaluation of the exchange rate and that SBP has not expressed any such view in its statements. Therefore, the statement made in your editorial is incorrect and misleading.
It is worth noting that while the concept of REER is simple, users often face difficulties in understanding its construction and interpretation. Often, appreciation or depreciation of REER is confused with the concept of currency overvaluation or undervaluation although these are two separate concepts. Neither can overvaluation or undervaluation be deduced from comparing the numbers to 100 as your editorial writers seem to have done.The REER number merely shows a comparison relative to the 'chosen' base year.
The extent of exchange rate under/over valuation is computed through a medium-term analysis using sustainable norms for the current account balance, fiscal balance, demographic condition, debt, etc.
2. Regarding point 2 raised in your editorial and mentioned above, the idea that State Bank profits will fall due to the expansion of refinance limits by Rs 200 billion for export- oriented sectors is also false. In fact, profits will actually increase by the amount of interest-earned on the principal amount of funds availed by firms under the EFS and LTFF facilities, at a rate of 3 and 6 percent respectively. Also, it should be noted that the banks and not SBP carries the risk for these facilities.
3. With respect to point 3 mentioned above, a simple comparison between interest rates on Eurobonds and local currency bonds is an incorrect measure of their relative cost and risk. An important point to note in this context is that, in the former case, the Government of Pakistan bears the exchange rate risk, while in the latter the lender/investor bears that risk. Furthermore it is incorrect to imply that the discount rate is the primary factor that has attracted foreign portfolio inflows as Pakistan had a higher discount rate in 2011 but attracted negligible foreign portfolio inflows in our debt markets.
The exchange rate is a very delicate topic to comment on due to its sensitivities for the economy and particularly the financial sector. Therefore, any casual remark could have deep negative repercussions, which an economy like ours going through a stabilization phase cannot afford.
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