The most frequent term used in recent weeks called as "stabilisation" surely has a reassuring reflection on External Accounts of Pakistan after implementation of IMF stabilisation programme. However, trade and investment in the country is still, by and large, under the lingering shadows of uncertainty.
Rupee exchange rate is a vital indicator of business health for exports, imports and investments. The economy has faced a roller coaster of exchange rate fluctuation since end 2017. If taken on the basis of last 18 months, Pakistan Rupee has lost around 40% of its value.
Remember; in the 2nd quarter of 2019, few overzealous economic analysts were projecting Rupee to surpass the level of 170 against USD by the year end. Come last quarter of 2019; few analysts are now suggesting that "the continuously strengthening rupee would peak out at around 150 to the US dollar by the end of March 2020"! In the same breath, they forecast that "Later, the rupee is anticipated to return to its depreciation phase around the fourth quarter (April-June) of the current fiscal year. The rupee may return to 164-165 by the end of FY20". A nightmare for investors planning machinery and raw material imports and exporters to conclude their longer tenured contracts spanned over next one or two quarters!
Exchange rate during last four months reflected a stronger Rupee (a trend which still continues) in the backdrop of propped up foreign reserves. Implementation of IMF programme helped to borrow from few other international fancier organisations as well. The improved foreign flows helped boost foreign reserves. In efforts to prop up foreign reserves to meet the agreed fiscal targets in the forthcoming IMF review, hot money flows found their way into the economy as short term support as well.
Business case for the latter is very simple. As explained by a financial analyst; the interest rate differential between Pakistan and global financial market stands at about 11.5%. Add the appreciation of rupee by around 5.20% since July 2019; cumulative return works out at 16.70% or so. SBP has confirmed over USD 1.2 billion flows by overseas investors and clarified this week that these flows reflect the growing confidence of international investors resulting from recent exchange reforms policies.
These short-term flows are good or bad for the economy? In short term, it paid off. For long term, the vulnerability of these flows would keep haunting the real economy. SBP may have to keep the interest rate at attractive enough level to keep the return on these investments lucrative. However, few interesting side-effects have emerged in money market, affecting the choices and future prospects of trade and investments.
With strengthening of Rupee during last four months, flows of export proceeds have been fairly steady. Current monthly premiums were attractive enough for exporters to massively sell the USD (or any other foreign currency) for their expected exports proceeds. With steady flow of dollars available in inter-bank, SBP recently allowed 50% advance payment of import LCs as well.
Meanwhile, taking the advantage of stable rupee exchange value and higher base interest rates at 13.25%, large and medium sized exporters are scrambling to have short-term borrowing in Greenback; commonly known as FE 25 to shift from KIBOR-based borrowing. It has similar dynamics like short-term foreign flows as borrowers can save around 11% on its cost of funds in Pak rupee (the differential of base lending rate plus spread and three or six months LIBOR rate as the case may be). This has suddenly created a substantial appetite for borrowing in foreign currency. The risk is well mitigated to the extent of interest differential in case Rupee is again up for the depreciation.
This has created a window of opportunity for exporters but those domestic industries based on local markets do not have any respite except to borrow at going base interest rates. Trade and investment sectors have been caught in between. For project investments with turnaround period of 18 to 24 months, what exchange and interest rate be provisioned for a dependable feasibility? A lingering uncertainty is an obvious hindrance to take medium term position for machinery imports.
Exchange and interest rates during last year and half have kept the project investors on edges of uncertainty. Now with appreciating streak of Rupee, exporters have joined them too by clinging the edges of same uncertainty. SBP needs to carve out a strategy to clear the haze of uncertainty for project investors and exporters. Pushing the borrows to dollar based borrowing, an unwarranted consequence of attracting hot money flows by default, would keep them engulfed in swinging exchange rates uncertainty till the haze is clear.
Probably, it's about time SBP deliberated on forward cover for machinery and raw material imports, significantly increased the funding pools under Export Refinance and LTFF and encouraged rupee-based lending by rationalizing the interest rate differential. Also, it's about time that SBP charted out a medium-term outlook of exchange rate enabling the exporters to conclude longer-tenor contracts with foreign buyers. During the fluctuating exchange rate saga for Pak rupee, currencies of regional competitors like India and Bangladesh have been fairly stable and range bound. Hence, Pakistan desperately needs stabilization for the real economy as much as it needs it for External Accounts.
(The writer is a political economist. Mail: khalidmrasool@gmail.com)
Copyright Business Recorder, 2019