The external sector account looks set to improve in FY15, but to what extent it can strengthen the rupee depends on several things, including financial market behaviour.

The federal budget has offered real incentives for textiles which, if availed of efficiently by exporters, can boost their dollar earnings and increase the overall export earnings.

Revamping of Pakistan Remittances Initiative has already accelerated growth rate of remittances.

“The central bank will not be able to support a falling rupee by resorting to net selling of dollars within a given quarter as required by the IMF. At the quarter end, it will have to square its position,” says treasurer of a local bank

This trend looks sustainable due to strict adherence by banks and exchange companies to the rules of the business and also because of the steps being undertaken to enhance export of manpower to the UK and the Middle Eastern countries.

Privatisation programme has got a psychological boost after the successful offloading of shares in United Bank Ltd. Going forward, the replication of this exercise in other state-owned entities or SOEs can fetch a handsome amount of foreign exchange. Foreign direct investment inflows have remained almost static in FY14 showing only 2.5pc increase in eleven months despite auctioning of 3-G and 4-G licenses to cellular companies.

But, according to officials of the ministry of finance, inflows are sure to rise in FY15 as scheduled under a lot of MOUs signed with foreign countries. Foreign portfolio investment more than doubled in FY14 but whether it would rise, and if so with the same pace in FY15 depends on a lot of things including political stability inside Pakistan and geo-political situation around the region.

“On balance, we’ve reasons to be hopeful about our external sector performance but ifs and buts are there,” says head of one of the top five local banks. “How and to what extent this perceived improvement will help the rupee depends on so many things, the most important being the behaviour of the financial market, the monetary authority’s forex market management preferences and the outcome of the government’s revenue and debt raising plans.”

In the second half of FY14, the rupee made a smart recovery and gained more than seven per cent in less than six months up to June 18, 2014. This happened largely due to forex inflows from the IMF, release of the coalition support fund by the US, a modest rise in exports and more than 10pc increase in remittances from overseas Pakistanis. But throughout the year, the rupee remained on the roller-coaster, facing a big loss in one quarter and making swift recovery and an even bigger gain in the next quarter.

“The revamping of PRI (Pakistan Remittances Initiative), introduction of tighter controls over forex companies, penal actions against some of them involved in speculation and scolding to discipline of some banks that too were found involved in irregularities have now resulted in a calmer forex market,” says a senior central banker.

“So far the element of forex market misbehaviour is concerned, you’ll see little of it in FY15.”

But that alone cannot guarantee that exchange rates will move solely in line with the developments on external accounts that actually reflect the true demand and supply situation.

One important thing that will impact much on exchange rate management is the IMF programme requirement: “the central bank will not be able to support a falling rupee by resorting to net selling of dollars within a given quarter,” says treasurer of a local bank.

“At the quarter-end it will have to square its position. This means if there are slippages in realisation of projected amount of dollars from any source and the rupee begins to fall, the real support will have to come from within the market or the loss in the rupee value will persist.”

Bankers also expect imports growth rate, which has been on the decline in FY14, to pick up fast in FY15 as the work on foreign-funded infrastructure and power sector projects begins and as textile and food sector exporters import machinery, new technologies and imported raw materials to make their exports more competitive and acceptable in global markets.

According to senior officials of the ministry of finance, during the coming fiscal year the drive to contain domestic debt would gather momentum and the real effort would be on meeting tax revenue and non-bank borrowings. Under this plan, another Eurobond can be launched and floating of Sukuk in the international market is well under way. A portion of the Pakistan Petroleum shares are also to be unloaded. They recall how the $2 billion Eurobond launched in FY14 helped in augmenting forex reserves.

Defending a desirable forex reserves level (currently $13.5 billion) and enhancing it gradually are two objectives both the central bank and the federal government share enthusiastically. “Going forward, their will to serve this objective can be tested if exports falter or if promised FDI don’t materialise on time,” fears treasurer of a local bank. Though large-scale manufacturing has risen more than four per cent in ten months of FY14, on month-on-month basis it has been on decline for the last three months. This, coupled with power shortages and growing political tension, are potential risk to recovery in exports. Bankers say these factors also merit consideration in building the FY15 exchange rate outlook, along with such positive things like the just- launched decisive offensive against terrorists and militant groups.

Published in Dawn, Economic & Business, June 23rd, 2014