KARACHI, April 25: The IMF wants more spending of foreign exchange, whose increased inflow has inflated the dollar reserves and triggered a stronger rupee.
While the government takes pride in building up unprecedented reserves of $5.4 billion, the IMF officials are of the view that “a more aggressive absorption of foreign exchange inflows may be warranted to avoid further appreciation of the rupee.”
The government is targeting a reserve of $6 billion by June-end this year, though an IMF mission report indicates that the authorities share the Fund’s view on increased absorption of foreign exchange inflows “with sterilization as needed to keep the monetary aggregates on target.”
Appreciating that the State Bank has made good use of large official grants and private capital inflows to build reserves, the Fund officials are of the view that “it has not fully avoided an appreciation of the currency that may complicate export recovery. And reserve money growth has accelerated to levels that warrant close watch over the coming weeks and months.”
Incidentally, the IMF staff appraisal mission, also sees that with capital inflows receding and imports returning to normal levels, upward pressure on the exchange rate is expected to subside supporting exports, which, it says, would start to recover in the coming months.
The IMF staff review report, however, concedes that among other factors home remittances improved because of “the growing confidence in the rupee and in the domestic financial system.” And the latest country survey of the Economist on Pakistan says that “estimates of the extent of the remittances through the hawala system range up to $11 billion. At least $3 billion could be routed through official banking channel within the next three years.”
Pakistani officials are confident that remittances would touch $2 billion by the end of the current fiscal. Currency experts say that the government should consider whether a strong rupee that attracts home remittances is the right option or a depreciating exchange rate that has kept export earnings stagnant between $8.5-9 billion and may not be of much help in an environment of a global economic slow-down.
Besides, export statistics show that the benefit of the devaluation goes to foreign buyers, with export of cheaper goods and services. Although the export volumes in terms of quantity have gone up significantly, export earnings suffered a loss of $900 million in 18 months ending December 2001 because of sharp fall in unit prices.
Some currency experts feel that inflow of home remittances, if encouraged through a right policy package, can exceed earnings from textiles that constitute over 60 per cent of the export earnings.
The impact of appreciation of exchange rate is positive in containing inflation rate through cheaper imports, renewing business confidence and investment, reducing debt servicing cost of foreign debt and fiscal deficits, say economists and businessmen, who oppose devaluation of the rupee.
This is partly supported by the Fund’s own report for the first half of current fiscal. To quote the IMF review report, “on the expenditure side, defence outlays were surprisingly Rs8 billion lower than programmed, resulting from savings due to more appreciated exchange rate, and lower fuel prices and imports.”