Exchange rate stability is a challenge

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Keeping the rate of exchange stable during this financial year is seemingly a challenge. In July, the primary month of 2021-22, the rupee lost 3.2 per cent of its value against the US dollar and within the first five days of August, it weakened further by another 0.5pc.

The rupee’s decline is primarily thanks to the structural weakness of Pakistan’s balance of payments (BOP). The depository financial institution of Pakistan (SBP) has left the exchange rate to the economic process and doesn’t intervene to supply the rupee artificial support though it sells dollars within the interbank market to smoothen extreme volatility when there’s occasional demand pressure on exchange rate . The market witnesses such volatility mostly at the time of external debt servicing or the clearance of a bulky oil bill and other import payments. But aside from such vagaries of the forex market, a key reason why the rupee’s stability proves short-lived lies within the structural shortcomings of the BOP.

According to the newest BOP statement, Pakistan’s remittances shot up to $29.37 billion in 2020-21 from $23.13bn in 2019-20. But this single factor, which is not any mean feat, was almost entirely liable for lowering the present Account (C/A) deficit to $1.852bn in 2020-21 from $4.449bn in 2019-20.

In 2020-21, Pakistan witnessed an enormous deficit of $30.030bn in total trade of products and services, up from $24.425bn in 2019-20, which suggests the impact of trade account was negative on the present account — and therefore the additional inflow of $6.24bn ($29.37bn minus $23.13bn) in home remittances played a decisive role within the lowering of the C/A deficit.

Our accounting comprises two key heads ie trade and remittances. Ideally, any improvement in C/A must originate from these two accounts. If a single-source impact reduces the C/A deficit, it’s qualitatively poor.

Read More: Roshan Digital Account inflow comes to $1.87bn

An expansion of the entire deficit during a year of economic recovery is understandable. But Pakistan has long been witnessing such a deficit year after year, not just thanks to greater imports in years of upper economic process but chiefly thanks to the sluggish growth in exports of products and services. In 2020-21, exports of products encouragingly swelled to $25.630bn from $22.536bn in 2019-20. But services’ exports rose modestly to $5.937bn from $5.437bn. there’s a requirement for maintaining the present growth in merchandise exports and for enhancing services’ exports. Without that total deficit can’t be narrowed and pressure on exchange rate may continue 2021-22 — or maybe beyond that.

Without finding dependable means to satisfy this structural need, Pakistan cannot easily get out of its BOP issues on a permanent basis. Occasional forex inflows — just like the special $2.8bn International Monetary Fund’s Covid-19 fighting fund expected to return in later this month followed by an identical $1.4bn special fund already received last year — cannot help address structural weaknesses. Nor can sovereign funds from friendly countries. Such temporary funding can only ease off forex-demand pressure for a short time .

Whereas the C/A deficit narrowed to only $1.85bn in 2020-21, the general BOP deficit expanded to $5.553bn from $5.299bn in 2019-20. A nominal increase within the BOP deficit — rather than a considerable decrease amidst growing exports and remittances — indicates that structural problems with the external sector are yet to be resolved.

The most important among them, as mentioned earlier, is that total exports of products and services aren’t growing fast enough — despite a spike seen in 2020-21 — to contain the general deficit .

This may emerge as a much bigger issue during this financial year because imports of products and services are likely to extend faster than within the last year because the country has set a better economic process target — 4.8pc against 3.9pc of last year. the bottom of merchandise exports has already expanded in 2020-21, squeezing room for an identical rate of expansion in 2020-21, particularly amidst the continued fourth wave of the Covid-19 pandemic. Accelerating services’ exports is feasible , more so thanks to the listing of Pakistan on Amazon and launching of Facebook Marketplace within the country. But the financing of tech startups remains absent or scant. And, overall services’ exports are yet to be brought under an umbrella of enabling regulatory requirements.

In the case of remittances, a meteoric rise of 27pc seen in 2020-21 would make it difficult to realize rate of growth even closer to the present level. High and low base effects on the expansion of remittances are well-established.

Besides, remittances grew in 2020-21 also thanks to the amnesty scheme offered for the whitening of undeclared wealth. That scheme (under which large volumes of funds were taken out of the country within the past and brought back under this scheme for investment within the housing sector) has expired. Unless the scheme is extended for the whole 2020-22 — or maybe beyond that — remittances seem set to say no .

Besides, the export of workforce in 2020 and within the half of 2021 is probably going to point out a lagged effect on remittances’ inflows now. (In 2020, only 224,705 Pakistanis went abroad for jobs compared to 625,203 in 2019. And, between Jan-June 2021 the amount tanked to only 121,391, consistent with the Bureau of Emigration and Overseas Employment).

The foreign direct investment that fell to $1.846bn in 2020-21 from $2.598bn in 2019-20 — also can not be expected to rise dramatically at a time when Pakistan is revisiting bilateral investment treaties with dozens of nations — and when the pullout of the US forces from Afghanistan has already started affecting political stability within the region.

Foreign portfolio investment — especially in debt securities — offers a silver ling though. In 2020-21, such investment in debt instruments crossed $3bn from a net outflow of $242 million in 2019-20 — thanks partly to the investment made by overseas Pakistanis in them through Roshan Digital Accounts. But the foreign currency debt instruments through which an outsized a part of foreign portfolio investment is being attracted offer very high returns. How long can Pakistan afford it’s a million-dollar question.

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