In Pakistan’s current context, the external debt payment schedule and pattern of foreign trade growth play a more prominent role in determining the market-driven exchange rates than anything else.

And for a country with inadequate foreign exchange reserves, the timing of any changes in these two factors also matters a great deal. For instance, Pakistan’s import payments began rising fast from March, after showing a subdued growth in eight months of FY13. In four months to June 2013, the monthly imports bill averaged $4.135 billion. Against this, export earnings averaged around $2.159 billion, and the monthly trade deficit stood at a tall $1.976 billion.

“So, the timing is important,” said the chief forex dealer at a foreign bank. “We had such a large trade deficit on the one hand and on the other the country also made about $1.5 billion external debt payments (mostly to the IMF) during this period.” Senior bankers say that this has been a major factor behind the rupee’s slide against the dollar in the last quarter of FY13, and in the first month of the new fiscal year.

“If you’ve got to do big external debt servicing, often several times in a month, and with not much in forex reserves, exchange rates will remain under pressure. Things become even more difficult when imports rise suddenly,” said a central banker.

With the speculative attack on the local currency, the difference between the open market and the interbank rates have increased to well over two rupees. As the market calls the shot, the exchange rates no longer reflect the purchasing power parity between the rupee and the dollar.

Forward premiums calculated by banks and quoted to importers and exporters serve as a key indication of the possible future movement of the exchange rate. On June 28, which was the last working day of FY13, the average rate for one-month forward dollar-rupee exchange was 100. In other words, the rupee was projected to fall from 99.66 a dollar (at the end of June) to 100 by the end of July. But as the market watched helplessly, the rupee actually declined to that level much earlier — on July 3, to be specific. This illustrates that building up a forex outlook at times of uncertain and rapidly changing external account situation is quite difficult. Isn’t it?

As the inter-bank forex market keeps a record, banks are able to see deviations in the actual exchange rate at any given time, compared to the forward rate of that particular day that they had worked out earlier. “This mechanism of forward rate quotations has enabled the inter-bank market on the whole to make more realistic projections of exchange rates,” said the treasurer of a large local bank. But not always.

It is also worthwhile to note that net foreign direct investment rose more than 100 per cent in the last four months to reach $1.447 billion at end-June, from about $672 million at end-February. Gross foreign buying of Pakistani equities shot up to $341 million in the last quarter of FY13, surpassing the total of $271 million in the earlier nine months. The prospects of more foreign investment have also become brighter after the new government came into power.

Meanwhile, bankers, stockbrokers and businessmen all believe that this positive sentiment would keep inflows of both foreign direct investment and portfolio investment steady in the near future.

But some bankers also fear that the improvement in foreign investment so far and the moderate growth in exports and remittances cannot make up for the drawdown on forex reserves, due to the huge external debt payments, and the recent rise in the imports bill. “So it’s actually the IMF loan that may provide us a real clue on which way the exchange rates will move in the near future,” says a foreign banker.

Other market players point out that the increase in FDI, remittances and export earnings could really positively impact balance of payments and the exchange rate if the new IMF loan comes in during the first quarter of FY14, enabling the country to retire old foreign loans without a further depletion in already low foreign exchange reserves.

In the meantime, bankers continue to speculate on US-specific forex inflows, including those falling due under the Coalition Support Fund, to build a realistic exchange rate outlook.

The dollar’s movement one way or the other does not directly impact our exchange rate as much as our own market dynamics do. Trade, foreign investment and remittance inflows all influence the exchange rate outlook.

And while an intense debate over the continuation of monetary stimuli in the US continues, the dollar has become stronger and many countries worldwide weaker including that of India. .

Meanwhile, some analysts point out that the recent downscaling of growth prospects of Asia means that our export-more-to-Asia momentum will also be tested, which implies a negative effect on our exchange rates.

But exporters believe that two things are far more important for them than the growth prospects of Asian, or for that matter other, export markets. The first is how soon can export-oriented industries start getting adequate gas and electricity supplies, and the second is how easily the private sector gets affordable bank financing. They believe that if things remain satisfactory on these two fronts, then accelerating the current export growth rate would not be a big problem for them.