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Managing forex reserves in tough times

April 01, 2013

The State Bank of Pakistan — File Photo
The State Bank of Pakistan — File Photo

THE State Bank of Pakistan has allowed banks to accept cash convertible currencies against exports to Afghanistan. The decision has been taken in view of the peculiar nature of trade with Afghanistan, where very limited banking channels are available for exports.

Bankers say the move aims at ensuring full realisation of the export proceeds originating from Afghanistan and thus, help boost foreign exchange inflows in the domestic interbank market. Earlier, a large portion of these export proceeds used to come via informal channels.

“Higher than interbank exchange rates prevailing in the open market used to compensate the exporters against whatever loss they incurred in rebates on their exports of eligible items,” a senior banker told Dawn.

The central bank has told commercial banks that they are supposed to surrender these export proceeds received as per the terms of sales in the interbank market.

Banks are also required to ensure that the said proceeds are backed by “proper export documents as per prescribed procedure and terms and conditions issued from time to time,” says a circular issued to inform banks of SBP decision.

The circular says that banks will issue Proceeds Realisation Certificates at prevailing interbank buying rates against over-the-counter sale of cash currencies, and credit their rupee equivalent in the local currency accounts of the exporters.

Central bankers say the move is one of several ways to increase supply of foreign exchange in interbank market at a time when short supply of dollars is threatening exchange rate stability and eroding foreign exchange reserves.

Coming into operation of Pakistan-China currency swap, tightening of rules to block capital flight through foreign exchange companies, streamlining procedures for faster realisation of export proceeds, dissuading banks from over-selling forward import dollar and enhancement of well-timed State Bank of Pakistan (SBP) interventions in the interbank market are some of the other measures, they say, “that can ward off undue pressure on the exchange rates.”

Central bankers who take this line of argument to remove fears of any major decline in the value of the rupee ahead of substantial external debt payments in April-June quarter point out that if the ongoing trend of declining imports and rising exports and remittances are further strengthened, “Pakistan will easily finish the third consecutive fiscal year without a new IMF loan”.

Bankers say that they have started financing import-export transactions under the yuan-rupee swap agreement between the central banks of Pakistan and China.

The swap-line is worth Rs140 billion, or around $1.4 billion, and can be reset through fresh negotiations after 2014. “Its difficult to estimate how much of the swap facility will be consumed during this fiscal year,” said a senior local banker. “But as bilateral trade is growing very fast and some importers are willing to use local currency (under the swap arrangement) for financing imports, even initial net impact on imports bill should be in millions of dollars.”

Despite the absence of any inflow of funds from the IMF after May 2010, additional pressure on the external sector (due to lost exports in the wake of the super floods of July-September 2010) and low levels of foreign direct investment, Pakistan has successfully met all external debt repayment obligations, including that of the IMF loan.

On March 28, the country made the 11th quarterly debt repayment installment of $144 million to the IMF, and arrangements are in place for repaying an equal amount on April 1.

The rupee closed at 98.44 a dollar in the interbank market on March 28, showing no big change over its beginning of the month rate of 98.25.

“The rupee looks stable as we’ve been repaying external debts out of our own foreign exchange reserves,” said a senior central banker. “But, of course, the reserves have taken a hit. What ought to be appreciated is that over the last few months, better foreign exchange management has curbed speculative tendencies to the extent that now debt repayments (out of forex reserves) hardly make any impact on exchange rates.”

He said exchange rates were fluctuating “almost completely in line with the actual and real time demand and supply of foreign exchange,” and pointed out that in nine months of FY13, the rupee has shed just four per cent of its value against the dollar.

The country’s foreign exchange reserves have, however, fallen from $15.288 billion in June 2012 to $12.37 billion as on March 22, 2013.

The declining trend of reserves may continue till the end of the current fiscal year in June, before the newly elected government can take a final decision on how to approach the IMF, or for that matter how to continue to live without an IMF loan, and look for other, more innovative ways of improving the external sector’s performance. The reason is that generally, a larger outflow of foreign exchange takes place in the fourth quarter of the fiscal year due to heavy external debt payments.

Immediately after paying $144 million on April 1, Pakistan will have to prepare for making another payment of $533 million to the IMF in May. “Now much would depend on how the external trade moves in April-June, how remittances behave, and whether we can see some increase in FDI,” said a central banker, before adding that remittances might grow a bit faster in the next quarter for a couple of reasons.

“A sizeable amount of foreign exchange will be coming in from abroad via remittances for election-related spending. And we hope that the caretaker government will soon announce a package of incentives designed for us by the outgoing government for mobilising more home remittances,” said the head of a leading exchange company.

He said that the relative calm in exchange rates, despite bulky external debt servicing, along with tightening of rules for over the counter selling of foreign currencies by exchange companies, has discouraged people from speculative buying of dollars, with the result that the gap between interbank and open market exchange rates has shrunk to less than 100 paisa per dollar. On March 28, most exchange companies were selling the dollar for Rs99.15 to Rs99.25, against the average interbank rate of Rs98.44.