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RUMOUR has it that the rupee has appreciated lately because the government received a $1.5 billion ‘deposit’ from the Saudis and sold a share of those funds in the money markets. Rumour said that the resultant glut of dollars caused a large sell-off by every other category of hoarder since nobody knew how much money the government really had, and where the selling would stop.
But now that the dust is settling on the whole episode, and the rupee is straining to find its moorings in the scared new world left behind by the crown prince, it appears that rumour may have overstated things a little.
It turns out that none of the money that flew in from our ‘old friends’ was actually sold in the markets. What’s more, it also turns out that the government has actually been purchasing dollars from the money markets over the past couple of months, contrary to expectations of selling. With almost $475 million purchased since February, the quantity compares favourably with the government’s last big foray into the forex market back in the first quarter of its rule, which sparked a large and destabilising depreciation in the currency at the time.
What’s more, some of the forward swap positions have also been unwound, although it’ll be a little while before we know by how much.
The reserve numbers tell a similar story. Foreign exchange reserves held by the State Bank have increased from $3.1bn in February to $4.8bn as of this week.
Likewise with government debt. For five months between August and December of 2013, the government was unable to find anybody willing to go much longer than six months on its paper. Out of 16 T-bill auctions — the government’s main short-term borrowing instrument — that were held in this time period, only four were successful for 12-month maturities. Similarly, the Pakistan Investment Bond (PIB) — the main long-term borrowing instrument — struggled to attract attention from market players in this same period, with amounts realised rarely rising to Rs30bn in the preferred three- to five-year maturities.
Then comes January and suddenly there’s an appetite for longer tenors. One-year T-bills score successfully four times out of five auctions with yields remaining stable. And the PIB auctions see a massive uptick, with almost Rs200bn realised in three-, five- and 10-year maturities in January, and even some activity on 20-year paper! And February sees this confidence level rise further still, with amounts realised rising to almost Rs250bn.
So let’s give credit where credit is due (no pun intended). There is indeed an uptick in the level of confidence in the economy. The appreciation of the rupee owes itself to this development, as does the market’s willingness to move into longer-term government debt. The private sector is borrowing at increasing levels, an important indicator of renewed activity as well.
But there is another matter at hand. The sudden appreciation of the rupee versus the dollar has inspired more than just curiosity. It’s true that the mystery of how exactly this happened has not been solved. It would appear that the sudden rise in the State Bank’s reserves spooked people into thinking that massive selling is about to take place, and they offloaded their dollar holdings in huge quantities to avoid being caught short, sparking a stampede into the rupee.
But it would be naïve to think that the government was nothing more than a passive observer in all of this. After all, it is a little strange that the rise of the rupee stopped exactly once it breached the Rs98 level, precisely where the finance minister had boasted — during a television interview of all things — he would bring the currency. Clearly, sentiment has been used to engineer the appreciation, but sentiment has been egged on by the strong arm of the state, if you catch my drift.
Having pushed the rupee up to 98, how does the finance minister expect to hold it at that level now? And if he intends to keep it there, what are his plans to address the deeper weaknesses in our economy that cause it to burn foreign exchange kind of like a generator burns diesel?
For example, this is how the State Bank puts it in the latest monetary policy announcement: “Reliance on one-off inflows and foreign loans may provide short-term stability, but share of private financial flows need to increase consistently to achieve long-term stability.” Translation: now comes the hard part! A little further down it talks about the growing trade deficit, saying this can be reduced only “by improving efficiency and competitiveness of exports”. Translation: you can’t afford the rupee at this level for very long!
Let’s recall at this point all the angry harangues that Mr Dar and his party colleagues directed towards the Musharraf government for selling Pakistan to a war that they said wasn’t ours, in return for a few dollars in balance of payments support. Let’s also recall their campaign promise to not ask for external aid. And now let’s ask, in fact insist, on finding out why the mystery owner of this $1.5bn ‘deposit’ wants to remain ‘anonymous’, and what other quid pro quo connected with this money also wishes to remain unspoken? It’s time to lift the curtain on Dar’s dollar debut.
The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.
Twitter: @khurramhusain
