He has done that after building up a reserve of $7.2 billion, inclusive of over $2 billion of private and bank holdings, which is an unprecedented event in our monetary history.
He is now acting under pressure from the IMF to let the dollar or the rupee find its own level in Pakistan instead of helping the rupee stay around 59.50 to a dollar through such purchases.
There has been pressure from various non-official quarters in the country for the government to use the large reserve to revive the economy fast by investing it in various development projects and reducing the widespread unemployment.
The government cannot respond to such calls positively as the money does not belong to it nor it is a part of its resources. This dollar reserve has been built using the various reserves of the State Bank of Pakistan which came from deposits retained with it by numerous government organizations and banks. So the dollar reserve cannot be reconverted into rupee and spent on various development projects or handed over to the government.
Exporters of Pakistan who have an export target of $10.1 billion to meet call for a a strong dollar or cheap rupee as they want more rupees for each dollar of their exports instead of losing 8 per cent of their earnings in rupees, as they have done after September 11 last.
But if the exporters stand to gain through a weak rupee the whole country, including the government stands to lose. Already the rupee if far weaker than the Indian rupee which is 48.50 to a dollar and the Bangladesh taka, which is 58.59 to a dollar. Any pressure to weaken the rupee further is absurd or utterly selfish on the part of those who demand that.
Exporters want larger refunds as taxes or hidden subsidies if the rupee is not devalued over a period of time. The government does not want to reduce its financial resources by paying larger refunds to the exporters, particularly when it does not have the money even to pay the current refund dues. And if the refund rates are raised now the IMF, too, may cry ‘foul’ surging what is being paid would be outright subsidy. The IMF also does not want further depletion of the revenues of the government and a larger budget deficit.
But what Dr Ishrat has announced is a not a permanent policy but the end of a phase which has resulted in a reserve of $7.2 billion. And that had come out of the $5.2 billion the bank had bought from the open market and $2.4 billion obtained through inter-bank deals.
When the bank needs more dollars or it feels that the rupee needed to be established it can intervene in the market. The fact that the foreign exchange dealers are to be replaced by better established foreign exchange companies does not mean that all malpractices or wild speculation in this area will be eliminated. Hence the State Bank has to be vigilant and play its interventional act discreetly and effectively.
Meanwhile the bank may have to give up its target of building up a foreign exchange reserve of $10 to 12 billion as had been mentioned earlier. Such a huge pile of dollars can bring additional pressure on the government from those unaware of the mechanic of modern finance, to spend a large part of that on development and cause frequent embarrassment to it.
Meanwhile the IMF has expressed its satisfaction with the fact that the economic reforms approved by it are on track and moving steady, and the government’s commitment to them is firm. And they feel assured that even after the elections President Musharraf will have enough clout to sustain and enforce those reforms.
Finance Minister Shaukat Aziz on his part is emphatic that this is the last aid package from the IMF and Pakistan would not negotiate another deal with the IMF with its numerous strings after the expiry of the current Poverty Reduction and Growth Facility next year. Top government officials, including the finance minister, are weary of the junior IMF officials virtually dictating to them.
In the days of the political rule Pakistan came to be known as a one-tranch country. Having agreed to all the conditionalities of the IMF and obtained the first tranch, the governments began reneging on their commitments and the deal with the IMF was off. Soon after that another round of negotiations with the IMF began but to end no better. But now following yet another review mission’s visit the fourth transche of the current PRGF programme of $ 114 million is to be given to Pakistan. And Paul Chabrier, Advisor tot he managing director of IMF, has gone back to Washington voicing his satisfaction with the performance of Pakistan.
Those who sold the dollars to the State Bank are reported to have gained a total of Rs11.6 billion. How much did the State Bank lose following the fall of the dollar from Rs64.11 to the current Rs59.50. The loss may be a book loss, and the total may exceed Rs25 billion if only the State bank’s reserves are taken into account.
The State Bank paid Rs 2 to Rs 3 per dollar above the inter-bank rate to obtain the money it needed from the open market money which was flowing in from outside. But when the State Bank needed not hundreds of million dollars but billion of dollars, through a slow process, it had to pay far more in rupees to mobilise over $ 7 billion. That was all the more necessary when such large sums had to be acquired discreetly instead of causing a stampede in the market, making the dollar fly high again.
Dr Ishrat Hussain says buying from the open market was essential as otherwise the option was seeking high cost commercial loans. Now the country has been saved from the need to repay $ 400 million more a year as short term debt servicing.
What now is the future of rupee or dollar in Pakistan? The external sector is very helpful. Exports are rising slowly but steadily, and the aid flows are helpful. International aid agencies, like the World Bank and the Asian Development bank,are increasing their long term loans. Overseas Pakistanis have doubled their remittances because of international factors. And an average of $ 400 million is coming in annually as foreign investment, Shaukat Aziz says.
Economic factors in the US are not strengthening the dollar. The euro is doing pretty well. So the future of the rupee or the exchange rate of the dollar in Pakistan depends on the extent of inflation at home, the real inflation and not necessarily the 4 to 5 per cent claimed by the government.
I am told that when these figures of low inflation were presented to President Musharraf recently by our officials he was too skeptical. The officials went home and worked on their figures again in great deal and went back to him and convinced him the figures wee genuine and based on proper market studies.
But the fact is that when the prices of POL, power and gas go up they have a strong cost push effect all around. And those forces cannot stop working in Pakistan when the prices of these government regulated services are going up all the time.
In our context export prices rise further as they need high cost inputs. If their prices rise the rupee has to be devalued, more so when the IMF wants market forces to prevail in Pakistan and the government wants to go along with it.
The current low inflation is attributed to the fall in demand following widespread unemployment and drop in wages of the employed, particularly in the large unorganised sector. A study of the Social Policy and Development Centre, too, affirms that.
Demand fell in the US following the economic downturn and crash in the stock market. The same happened in Japan. And the government came out with stimulus to make the people spend more as they had large savings. But the masses of Pakistan have too little of savings and are usually heavily indebted with high interest to pay the money lenders.
Low inflation as a result of such adverse trends in Pakistan is not a happy development. But the government is coming up primarily with poverty reduction measures, and the people can spend more only on food and other very basic needs.