KARACHI, Nov 5: A stronger rupee has improved the equity market outlook for domestic investors unlike the past when depreciation of the national currency made rupee returns distinctly unattractive on a soaring greenback.
Financial analysts here said that “for once the domestic investors may obtain rupee returns that are greater than dollar returns.”
The recent spurt in the rupee would also improve the return of multinationals in dollar terms and reduce cost of local investment made on imported machinery and plants.
Analysts also see equity market getting a boost from “a process of long-term rupee reverse capital flight” that is being set in motion by the changing global economic scenario.
“We expect most of it (capital) to be parked in the rupee financial assets, largely in bank deposits, but also a significant amount in the equity market, which offers the most anonymity of all domestic financial assets,” says a report by a brokerage house.
Contrary to market perception, the rupee has gained in value against the dollar after September 11. With world trade contracting as a result of global recession, the demand for dollar is not picking up. Further, the sweeping global financial investigations by the US and its coalition partners in the war against terror are eroding the safe haven status of the Hawala business. The fear is prompting some Pakistani depositors to encash their dollars in rupees. The stronger rupee, however, does not reflect improved economic fundamentals.
Currency experts say that tracing Hawala transfers would also involve investigations into dollar accounts in banks and it is likely that the investigations would net some of these accounts. Individuals and businessmen extensively use both transfers and deposits for undeclared incomes as well as for legitimate business purposes.
Under global scrutiny, hawala business that has thrived for ages on anonymity, may shrink. Pakistanis with off-shore deposits may find rupee financial assets in their home country much safer.
The margin between the kerb and inter-bank rate has virtually disappeared, indicating that a strong kerb rupee has been the prime mover. And a currency expert says that the rise in the kerb value of the rupee “may be matched by positive longer-term fundamentals that affect the inter-bank market.”
As the margins between the kerb and inter-bank rate has virtually disappeared, the banking system has to be made efficient and service-oriented to compete with the Hawala business. The margin is down to about 15 paisa per dollar compared to Rs.2 or more, prior to September 11.
A strong rupee may help boost home remittances and reverse capital flight, whereas a weak rupee may or not help boost export when global trade is shrinking. Exports to Europe and the US have stagnated at almost the same level for past two years at $4.6-4.7 billion.
Foreign trade has been hit by the increased perception of risk for Pakistan following the campaign against terror. The war risk premium is estimated at $100 per container on all ships from and to Pakistan, making both imports and exports costlier.
Policy makers see some silver lining in reversal of flight of capital and home remittances through official channels and cut in the oil import bill by about 40 per cent, if the present trend in oil price prevails throughout the year.
With the margins between kerb and inter-bank rate disappearing and rupee shedding its weakness, the State Bank governor Dr Ishrat Husain is believed to have asked his staff to hasten the process of creation of foreign exchange companies that would be the first step towards one exchange rate. Originally, the exchange companies were to be allowed to start operations from next fiscal year.
A former president of the Federation of Chambers of Commerce and Industry Latif Ebrahim Jamal says that in the changed currency market scenario, the government should review its policies and move rapidly towards one exchange rate with the support of the IMF.
And Dr Ishrat Husain has reportedly advised the commercial banks to make use of this abnormal situation to secure more remittances to offset the decline in the country’s exports. A State Bank source said remittances have picked up in September 2001 compared to the same month last year.
Optimism is also being expressed that the country’s economy has the resilience to withstand exogenous shocks. Addressing a seminar on the PAF, Karachi Institute of Economics and Technology on “the aftermath of September 11” a former president of the Chambers of Commerce and Industry Mr Yusuf Shirazi recalled how the national economy had come out of the woods in the 1965 and 1971 wars. He felt that reversal of both capital flight and brain drain in the current global scenario could help Pakistan face the present crisis.
In the face of shrinking world trade, globalization would slowdown and self-reliance would get a breathing space to grow. A strong rupee and a renewed confidence in the national currency may help revive investment climate and reduce the economic cost of the global campaign against terror. And Yusuf Shirazi stressed in his speech that only local investment would promote foreign investment and not vice-versa.