October 15, 2001	Monday	Rajab 27, 1422

THE heavily depreciated rupee rose modestly against the US dollar after the terrorist attacks on New York and Washington on September 11 and the global economic uncertainty that followed, and has largely stabilised thereafter.

But there are good reasons why the rupee should rise again, and certainly not go down in the immediate future. The question is whether in these favourable circumstance the rupee will rise at least to the level of the Bangladesh taka which is now 56.95 a dollar, if not of the far stronger Indian rupee which is 47.96 to a dollar?

If there are some valid reasons why the rupee should go down, and they are obvious, there are equally strong and varied reasons why the rupee should rise substantially in the new international context in the front line state in the war against terror.

On the negative side are the falling exports against the target of 10.1 billion dollars which, according to commerce minister Razzak Dawood, will rise to $1.4 billion and far more, according to others unless the US and the European Union open up their markets for quota free and duty free import of Pakistani textiles and other specified manufactures.

Along with that the home remittances of Pakistanis overseas which last year crossed one billion dollars slipped again in the first quarter of this financial year ending September 30.

If our exports will be hit, our imports bill may also come down, particularly in respect of oil which has slipped to 20 dollar a barrel again from the recent peak of 34-36 dollars.

But even if the US and European markets open up for our goods we can face the physical problem of exporting if ships are not available. Already a number of major shipping companies have cancelled their services to Karachi, and they include the APL. P and C. Nyk OOCL, Hyundai, and Wanhai.

Even if the ships come ultimately the heavy war risk premium which is a highly contentious issue, can make our exports and imports too costly, and wipe out the benefits of the fall in world oil prices.

Finance minister Shaukat Aziz who is in Washington now says the US and other Western donors and Japan would make up the loss in export earnings and fall in revenues because of diminished economic activity following the war. This means in terms of foreign exchange what we lost through one hand we may get enough by another. A very major reason why the pressure on the dollar in Pakistan will ease and its exchange rate can come down from the high Rs62.40 to dollar in the inter-bank market and 63.60 in the open market, is the abstention of the government or the State Bank of Pakistan from the foreign exchange market.

During the last two years the State Bank had bought over 3 billion dollars from the open market which pushed up dollar prices. But in view of the expected far larger assistance from the IMF World Bank and Asian Development Bank the State Bank need not have recourse to the open market to service its foreign debt.

More foreign aid will be coming through soon. The last tranche of the Standby Agreement with the IMF has already been paid up promptly. And negotiations for the new three-year Poverty Reduction and Growth Facility, initially estimated at $2.5 billion are making rapid headway. There are reports from Washington, the overall aid package may be raised to $7.5 billion including - new loans and re-scheduling of old loans. Germany too has said that it will try to provide larger aid through the international aid agencies.

The prospects of write-off of a sizable part of the $ 38 billion external debt are there. Meanwhile larger re-scheduling of the old loans may be initiated to reduce the burden on Pakistan.

A large part of the $600 million committed by various donor states, including the US, for relief of the Afghan refugees, may be spent in Pakistan to buy wheat to provide food aid, tents and medical supplies.

If US troops are stationed here or visiting they too will be spending their dollars. Already a large number of foreign journalists in Islamabad, Peshawar and Quetta are spending their dollars which come to the open market.

And while direct foreign investment may not be coming until things stabilise after the military operations cease, there was an inflow of five million dollars of foreign investment on the Karachi Stock Exchange on Tuesday.

As a result of such developments the foreign exchange reserve of the country have risen to $3.330 million, with $1.7 billion in the State Bank of Pakistan and the balance with the banks and private depositors.

One of the reasons for the recent rise in the exchange rate of the rupee was less demand for the dollar among private individuals because of global uncertainty. There was also less outflow of money and so the less demand for dollar. The people with surplus funds were not sure of the shape of things to come globally, particularly in the Gulf region.

Even more demoralising for the Pakistanis wanting to send money to the Gulf is the fact the Gulf states have stopped issuing visas to Pakistanis. Keeping money in other parts of the world too has its problems. To begin with interest rates in those countries have come down sharply. Bonds, too, yield far less than before.

There are greater chances of the sources of their money being looked into or questioned now than before. If the money has been earned through crime or outright corruption the risk of forfeiting a part or all of it is there.

Transparency International with its base in Berlin which is to publish its latest table of corrupt nations this week has urged the world leaders terrorism and corruption should be fought together and alike because of the linkages between them. And that call is having sympathetic ears among the leaders of the West.

The West wants to look into the monetary operations of the Dubai banks as they are reported to be providing safe haven for much of the illegal and corrupt earnings of the region.

The numerous tax havens of the West like Jersey, Isle of Man, Luxumberg etc., where some of the Pakistanis keep a part of their hidden assets can also come under scrutiny now. And the Pakistan government would love that as that may eventually help retrieve some of the $100 billion kept abroad by Pakistanis, mostly illegal, corrupt or criminal earnings, including through drug trade.

If the campaign against corruption becomes global in the manner the campaign against terrorism had become global that is good for Pakistan, and bad for its corrupt and criminal elements and the drug mafia.

Pakistan has already come up with a new law which forbids the government from seizing the foreign exchange accounts of Pakistanis. And now the difference between the inter-bank rate and the Kerb rate for the dollar has been reduced from Rs 4 and 5 to Rs 1.20. And the governor of the State Bank Dr. Ishrat Husain says that this narrow gain will discourage Pakistanis overseas from sending their remittances through the risky Havala system, albeit that is not as risky as he thinks.

At the same time Pakistan has to offer attractive returns on bank deposits and fixed accounts instead of talking of abolishing interest or offering very low interest rates because of the low inflation rate alleged which is not a fact.

If we had a healthy stock exchange or capital market and if NIT and ICP were paying better dividends far more of the savings and overseas remittances could have gone into them. Guaranteeing protection from seizing of foreign currency deposits alone is not enough.The savings have to be far more gainful.

There has also been talk of a devaluation of the dollar in view of the downturn in its economy which is heading towards a recession after September 11. Experts argue the US economy may not recover in full before the second quarter of next year. The solution for some is not only the lowered interest rate which had been reduced nine times but also devaluation of the dollar to boost its exports. And should discourage dollorization in Pakistan.