THE SBP authorities, off and on, have been claiming that since 1999, high cost commercial debts of around $4.5 billion have been repaid, while the fresh low-priced debts of about $2.5 billion have been contracted.
This assertion has neither been confirmed by the data published by the SBP in the quarterly reports issued during FY-02, nor in the annual report (AR) under review. On page 151, it has been stated that the short-term commercial debt of around $1.9 billion has been repaid during FY02. Such large short-term commercial debts never remained outstanding during the last 3-4 years. The data of the short term/medium term commercial debts outstanding at the end of these years as contained in Table 8.7 are: TABLE I
When the quantum of short-term commercial debts was not so large, the assertion of the repayment of $2.5 billion on this account during the last two years or so is not comprehensible. The repayment of the old (high-priced) debts and the contracting of the fresh low-priced debts has been described as the “substitution” of debt from hard to soft (page 143). Here, it has also been mentioned that the World Bank’s costly old loans of $900 million were repaid during FY-02. The question is “were these loans repaid prematurely?”. If not, the repayment was a routine matter unless the country intended to default or declare a moratorium. It is thus not a real “substitution”.
The economic managers could claim the credit only if they had repaid the old loans without creating fresh burden for the public. As for the pricing, the annual report adds that the borrowings from the IDA are at zero interest rate, but neither the interest rates on the borrowings from the World Bank, the Asian Development Bank etc., have been specified nor has it been indicated whether these loans are on the “fixed” or floating” interest rates. The IDA does not charge interest, it levies nominal service charges of 3/4 per cent p.a., but the other two multilaterals lend at the market-based and floating rates. If that position is correct, the borrowings from them may look cheaper at the moment because the prevailing rates at present are lower but nobody could predict the interest rate behaviour during the long period of the next 2-3 decades, and today’s cheaper debt servicing may become a difficult legacy for the coming governments.
The assertion of the repayment of $900 million to the World Bank during FY-02 is also not corroborated by the data given in the Table 9.8 (page 167) where payments to the World Bank have been put at $231.9 million only. This cannot be taken as the net out-go because the amounts of receipts from the IDA/World Bank have separately been indicated in the same table.
At the time of concluding the debt reprofiling arrangement with the Paris Club, it was claimed that there would be a debt relief of about $2.7 billion during the 3-year period. But it has surprisingly been mentioned on page 147 of the annual report that “despite the restructuring, Pakistan’s external debt servicing liabilities has increased from $5.1 billion (in FY-O1) to $6.3 billion (in FY-02).
Exchange rates: The AR states that there has been a complete “U” turn in the exchange rate management policy of the SBP e.g., there was a shift from the one-sided sale of the US dollar to inter-bank market and keeping a cap on the exchange rate on the sale/purchases from the inter-bank market/abolishing the cap on the exchange rate and rather monetary policy was used to quell the market pressures. How far the monetary policy helped in keeping the rupee/dollar parity at the desired level is rather a matter of deeper study. The SBP has, however, been able to undertake a shift in the policy, primarily because of the heavy generation of foreign exchange through purchases of dollar from the kerb/inter-bank market, the inflow of remittances from abroad by the Pakistani workers through banking channels, receipts of foreign grants, receipts for the provision of logistic support to the American troops in connection with the Afghan war, inflow on account of remittances of the amounts disbursed under foreign loans/credits after the removal of the post-nuclear blast sanctions, (imposed in 1998) etc,.
All this was as a consequence of September 9, 2001 events. Some of these sources comprised mainly one time operation. What is to be emphasized here is that the heavy inflow of funds from abroad enabling the SBP to take a “U” turn in exchange rate policy was not the result of policies pursued by the present economic managers. It may be mentioned here that the previous SBP Governor had also resorted to the purchases of dollar from the kerb market but it was at the limited scale because he was hand-tight by the IMF, while this time the IMF gave a free hand in this regard.
Even under the old system, when the banks were operating under the Nostro limits fixed by the SBP, they used to approach the SBP for the supply of dollar only when the market was short on any day. In a situation where the forex inflows exceed the market outflow needs, the banks would not naturally approach the SBP and the “U” turn would more or less be automatic.
On page 184 of the AR, it has been observed “as per the historical trends the rupee/dollar parity are generally characterized by long periods of stability before being interrupted by sharp phases of depreciation”. The assertion relates to 13-year period 1990-2002 as it is linked to figure 9.31 (page 181 of AR). To examine the above assertion, an endeavour has been made to study the rupee/dollar exchange rate behaviour over a longer period of time. The rupee was pegged at 4.76 to a dollar until May 10, 1972. The next day, the government of Zulfiqar All Bhutto fixed the new parity at Rs11, depicting the devaluation of rupee to the extent of 56.73 per cent. In February, 1973, the dollar was devalued by 10 per cent, and the rupee was not proportionately devalued and consequently, the revised parity was fixed Rs9.90 per dollar. This fixed parity continued till January 9, 1982. From January 10, 1982 the rupee was defined from the dollar and was put on the managed float under which the Governor, SBP, used to review dollar/rupee parity daily and changed it when necessary.
Under the above arrangement, the dollar/rupee parity was changed on 67 occasions in 1982 (45 depreciations and 22 appreciations), on 28 occasions in 1983 (17 depreciations and 11 appreciations), on 39 occasions in l984 (27 depreciations and 12 appreciations), on 22 occasions in 1985 (13 depreciators and 9 appreciations), on 18 occasions in 1986 (15 depreciations and 3 appreciations), on 15 occasions in l987 (8 depreciations and 7 appreciations), on 26 occasions in 1988 (24 depreciations and 2 appreciations), on 38 occasions in 1989 (35 depreciations and 3 appreciations), on 47 occasions in 1990 (31 depreciations and 16 appreciations), on 53 occasions in 1991 (46 depreciations and 7 appreciations), on 26 occasions in 1992 (23 depreciations and 3 appreciations), on 36 occasions in 1993 ( all depreciations), on 20 occasions in 1994 (18 depreciations and 2 appreciations), on 20 occasions in 1995 (18 depreciations and 2 appreciations), on 20 occasions in 1996 (all depreciations), on 6 occasions in 1997 (all depreciations).
The year-over-year details of the devaluations of rupee against dollar are given in the table below: TaBLE II
The parity of one dollar=Rs44.05 remained in force till early 1998 when the authority for fixation of dollar/rupee rate was delegated to the banks by the SBP. Thereafter, atomic detonation took place in May, 1998 and numerous changes were introduced and taken back from time to time.
The observation in the report that the rupee had witnessed a long period of stability before being interrupted by sharp phases of depreciation is not borne out by the trend of rupee depreciation under the managed float system which was in vogue from January, 1982 to early 1998. The changes during all these years were by and large gradual and small. There has no doubt been comparatively higher devaluation of rupee during (September October) 1995, 1996 and 1997 but these changes can be attributed to our failure on at least two out of these three occasions to comply with the conditionalities of the IMF viz-a-viz the Extended Structural Adjustment Facility (ESAF), the Extended Fund Facility (EFF) agreements and the suspension of fund inflow thereunder compelling us to run after the IMF for emergency funding under the stand-by agreements at a much higher interest rate, and the September-October sharp devaluations of 1995, 1996 and 1997 may have to be visualized in that context.
During 1999-2001 too, the rupee remained stable for some time only because of the cap imposed by the SBP and fluctuated when the free float was allowed to become operative and during that period too, the changes were not abrupt but gradual, though sharp.
Liberalization: During the regimes of Nawaz Sharif, a number of liberalization measures were introduced in the field of foreign exchange which, inter-alia, include eliminating the import licensing system, empowering the banks to first fix exchange rates for various currencies in terms of Pakistan rupees and later to also fix the dollar/rupee rate, grant forward covers to the importers/exporters etc., without the recourse to the SBP, opening Pakistan’s stock exchanges to the foreigners etc,. Most of these liberalization measures had to be taken back in the post- detonation scenario in 1998. The present government revived the said liberalization measures, besides introducing the new ones. The AR under review speaks of the introduction of the following new measures:
* The condition of approved commercial transaction for any inter-bank deal was abolished. (In other words speculative purchase/sale of foreign exchange between the banks was made permissible).
* The limits on foreign exchange payments relating to travel and health were also abolished.
* The facility of back-to-back remittances was reinstated, (banks were allowed to issue the travellers cheques against the surrender of equivalent amount in foreign exchange in cash).
These liberalization measures were taken as a part of the “Pink Pill” treatment which the IMF administers to the ailing economies the world over. But there will hardly be any instance in the Latin America, Asia and Africa where the patient may have been cured by the IMF treatment.
At times the IMF treatment is rather hard and unnecessary for the “ailing” country. For example, the individual private travel quota of $500 every two years was raised to $1000 and then to $2,100 every year as per IMF tenet. There was a general complaint that because of the kerb market premium, individuals used to draw private travel quota from the banks and sell them in the kerb market instead of undertaking the travel. To put an end to the malpractice, the government imposed 5 per cent tax on the release of travel quota in mid-l990s which effectively checked the malpractice and amount of release by the banks on this account was sufficiently curtailed. But this became unacceptable to the IMF and the tax had to be withdrawn in less than a year. However, at the present juncture, where free market premium has collapsed, liberalization is not likely to lead to the malpractice of the past.
The speculative foreign exchange purchase/sales is a dangerous phenomenon if it is opened to the public. Since this at present remains confined to the inter-bank transactions only, it may not prove so harmful, as the SBP monitors the exposures of the banks. It would be recalled that the speculation coupled with complete freedom on the inter-country capital movement was one of the reasons which collapsed the East Asian Tigers in 1997-98. Another item collapsing these economies was opening up of the bourses to the non-residents because these markets are merely the speculation shops and the money brought therein is a “hot money” recall of which at any time can upset the balance of payments of the less developed economies. The portfolio investment has no point of advantage for the developing countries as it neither creates new employment opportunities nor expands the production base resulting in export boost. But the developing countries have perforce to swallow the IMF’s this “Pink Pill”as well. The Malaysian Prime Minister was the only sane voice who after 1997 debacle advocated exchange controls including the controls on capital movement. He also saved his country from the IMF “Pink-Pill” treatment by not accepting its assistance and successfully managed the crisis. Other countries like Indonesia accepted the IMF’s offer and everybody knows where they stand at present.
We had opened up our stock exchanges in early 1990s. How this benefited our country can be gauged from the following statistics of inflow/outflow in/from the Karachi Stock Exchange as given in the SBP AR (page 124) under review: TableII
It would be seen from the above data that Pakistan has lost substantial amount of Rs 9,734.5 million during the 6-year period by opening up our stock exchanges to the foreigners. This figure shall further rise if we take into account the funds remitted by the overseas investors through the kerb market during the period when such remittances were under the ban clamped by the SBP due to precarious foreign exchange position, immediately following the nuclear blast in May, 1998. But alas, we have to follow the IMF diktat in any case because during our over half a century history, we did not get a sincere leader like Mahatir Muhammad.
