During eight months of this fiscal year, between July 2019 and February 2020, Pakistan’s home remittances grew just 5.4 per cent and exports even less — 3.65pc. Now, the scope for boosting these growth rates is limited. The reason is the coronavirus pandemic. It has started taking a heavy toll on the global economy. The plunge in oil prices to 1990 levels is a sign of a looming recession in different parts of the world. It has shaken global stock markets to their roots. This extent of damage has never been seen since 1987.

Foreign investors are pulling out from commodities and stocks markets and looking for safer avenues of investment including governments’ debt instruments. The coronavirus-driven economic slump, meanwhile, is spreading across the globe hitting trade, travel, transport, tourism, sports and recreation industries. The global economy that grew 2.9pc is being projected to grow 2.4pc in the best case scenario – and just 1pc in the worst.

Our external sector remains vulnerable. We get more than 53pc remittances from the oil-producing Gulf Cooperation Council region where economic growth and jobs are at stake due to the oil price crash and the coronavirus-driven slowdown. Sustaining even the current rate of growth in remittances has become more challenging.

The outflow of foreign exchange when the forex market is under pressure due to the end-of-quarter external debt servicing is making the dollar dearer

Challenges on the export front are no easier. Europe and Japan are heading towards recession and the economic growth outlook of the USA, our biggest export market, is also losing shine.

Right from the start of this month, foreign investors have been pulling out their investment from our high-yield short-term treasury bills. The State Bank of Pakistan (SBP) is due to review its monetary policy on March 17. If it goes for a policy rate cut, the return on T-bills that are already down in anticipation of this move may not remain high enough to attract foreign investment.

Alarmed by the coronavirus-driven disruptions in the supply chain in China and elsewhere, Pakistan may attract some foreign direct investment (FDI) as global companies start relocating businesses. But that prospect is in the medium- to long-term. On this count, no big jump in FDI can be expected in the short run. So, our external sector may remain in trouble. This fearsome prospect is now reflecting in our exchange rates.

In the last fiscal year, the rupee lost 31.7pc value against the US dollar. The SBP let it fall to 160.05 a dollar from 121.50 as forex demand for imports and external debt payments peaked and supplies fell short of meeting it.

But since the beginning of this fiscal year on July 1, 2019, the rupee’s slide came to a temporary halt as Pakistan secured a $6 billion International Monetary Fund loan and the Fund began making quarterly payments. During the first eight months of this fiscal year, the rupee rather regained some of its lost value and closed at 154.23 per dollar at the end of February against 160.05 at the end of June 2019. A steep decline in imports and the inflow of hot money or foreign investment in short-term T-bills also augmented the rupee’s health and lifted sagging forex reserves of the SBP.

However, at the begging of March when news of lower headline inflation in February compared to January poured in, banks and financial markets started expecting the easing of the monetary policy. In the central bank’s auctions, yields on T-bills also fell sharply. That alarmed foreign investors. They stopped pumping in more hot money and stopped rolling over investment in T-bills. Between March 1 and March 11, markets saw a net outflow of $600 million plus from T-bills, according to the SBP stats.

This sudden outflow of foreign exchange came at a time when the forex market was already under pressure due to end-quarter external debt servicing.

Consequently, the dollar became dearer and the rupee began losing its value once again. The SBP, eager to let exchange rates remain market-driven, watched from the sidelines. And even if it had dared to intervene, violating one of the pre-conditions of the IMF loan, it could not have done so with its forex reserves just enough to cover three months of merchandise import bill. In four working days (March 9-March 12) the rupee lost about 4.9pc value coming down to 159.13 a dollar on March 12 from 154.24 at the last working day of the preceding week on March 6.

So, the recent fall of the rupee reflects some real and perceived weaknesses in our external sector fundamentals. The SBP is trying to keep the forex market calm through moral suasion. Foreign exchange companies have sought the SBP’s permission to sell the excess forex cash in non-dollar foreign currencies to banks that they routinely take to Dubai to bring back their dollar equivalent. The central bank is expected to grant this permission on certain conditions and hopefully, the slide of the rupee may stop shortly.

Crude oil prices have shed a little less than half their value since the beginning of February and are less likely to reach the end-of-January level of $62 per barrel any time before the close of our fiscal year in June. This means Pakistan can save $4bn-$5bn in oil imports. The bulk of the saving would occur in March-June.

That is one big positive for Pakistan’s external sector. Besides, the freezing of energy prices for export-oriented industries and the recent decision to exempt remittances from withholding tax may keep growth rates of exports and remittances intact — if not boost them.

A weaker rupee should help accelerate exports’ growth rate provided exporters add higher value to local industrial inputs, improve their brands’ image and do aggressive marketing.

But these are just hopes and translating them into reality would require focused efforts particularly on the exports front. Much would also depend on how fast large-scale manufacturing output picks up growth. It contracted by 3.35pc in July-Dec 2019 though in the month of December alone there was 9.66pc year-on-year growth.

Published in Dawn, The Business and Finance Weekly, March 16th, 2020