Pakistan: Central bank Justifies decline in remittances and export proceeds

There has been a narration in print and electronic media suggesting that capping the price of US$ caused loss of US$3 billion in remittances and export proceeds. State Bank of Pakistan (SBP) termed that the view was incorrect due to a number of factors.

First, export of goods have been facing headwinds due to moderating demand in international markets as most of Pakistan’s major trading partners are going through a period of monetary tightening. For instance, US Fed increased interest rate to 4.5% to date from 0.25% in March 2022; suggesting a noticeable global monetary tightening.

Meanwhile, inflation has been significantly higher in developed world, eating into the purchasing power of consumers. These, together with domestic factors like devastating floods and ensuing supply disruptions, have negatively impacted exports. In this backdrop, linking decline in exports to relatively stable exchange rate is not appropriate, said SBP.

Second, workers’ remittances were gradually tapering off from all time high level of US$3.1 billion achieved in April 2022 due to Eid related flows. This decline is primarily attributed to global economic slowdown as higher inflation in developed countries has led to higher cost of living abroad, thus reducing the surplus funds that could be sent back to homeland as remittances.

Moreover, with the resumption of international travel post COVID, some remittances have switched back to FCY cash transfers via overseas Pakistanis travelling to Pakistan.

Thus the decline in Pakistan’s exports and remittances is a result of numbers of exogenous factors and domestic reasons and it wouldn’t be appropriate to ascribe it to exchange rate only.

Pakistan Stock Exchange index up 2.95%WoW

As the political noise in the country eased off considerably, the benchmark index of Pakistan Stock Exchange (PSX) posted a robust uptick. The index moved up by 1,237 points during the week ended on November 11, 2022 to close at 43,093 points, up 2.95%WoW.

The uptick in index was witnessed amid healthy participation with the weekly average daily traded
volumes also jumping by 8.8%WoW to settle around 306.4 million shares, as opposed to 281.5 million shares witnessed last week. Stability also returned in the foreign exchange market during the week with PKR holding its ground against US$ at 221.6, appreciating by 20bpsWoW.

The newfound stability in PKR came amid a hefty depletion in country's official foreign exchange reserves which declined by US$956 million as the country made repayments on its international debt.

Major news flows during the week were: 1) SBP taking various steps to contain foreign exchange outflow, 2) Cabinet approving US$900 million escrow account for Reko Diq in March next year, 3) Bank Alfalah expressing plan to buy back 200 million shares, 4) DFML to start assembling LCVs, 5) first quarter fiscal deficit soaring to one percent of GDP from 0.7% of GDP, 6) Cement, CNG, Fertilizer sectors to face gas shortage in winter and 7) FBR Chairman ruling out any new tax amnesty.

The top performing sectors were: Leasing, Vanaspati and Allied, E&Ps, Refineries and Technology, while the least favorite sectors were: Miscellaneous, Sugar, Textiles, Leather and Tanneries (-0.8%WoW) and Woollen.

Stock-wise, top performers in the KSE-100 Index were PGLC, TRG, FABL, PPL and BAFL, while laggards were: PSEL, SHFA, SCBPL, ILP and FFBL. To five volume leaders for the week were WTL, HASCOL, CNERGY, DFML and FFL.

Flow-wise, Mutual Funds and Banks were the largest buyers in the market during the week, with net buys of US$3.6 million and US$3.0 million respectively. While Foreigners and Insurance Companies were major sellers,
with the cumulative net sells of US$4.7 million and US$6.0 million respectively. The foreign outflow was largely concentrated in sectors namely Banks (US$5.31 million) and Technology (US$1.05 million).

After a relatively stable week for the currency, PKR may yet again come under pressure as foreign currency reserves posted a spectacular decline during the
week, while the inward remittances also slowed down significantly, falling by 9%YoY during October 2022.

On the political front, the things may start heating up once again as country's largest political party starts its
long march once again. Both these factors may yet again prove to be market dampeners and the resurgence that the market showed during this past week may fizzle out once again and the index may see a renewed selling pressure.

Investors are advised to maintain trading positions only and refrain from building and holding long positions in the market.

Darnomics or Illusion

Without mincing words, allow me to say that Pakistan’s Finance Minister, Ishaq Dar, is busy in creating illusion that with his taking rein of finance an era of prosperity has begun. His premise that Rupee has got stronger against US dollar is nothing but gimmickry.

Let me remind my readers around the world that lately US dollar was made stronger artificially by the US administration. The US also wanted to create illusion that hike in energy prices around the world has failed in denting economy of the country.

One may recall that lately when OPEC Plus decided to curtail output, Joe Biden, President, United States was most furious. He knows that hike in motor gasoline is bringing down his popularity graph, which may led to defeat of his party in the mid-term elections.

Therefore, the attempts by Dar to show that Rupee is getting stronger are ‘misplaced’. In this endeavor, Pakistan is bound to lose more of its limited foreign exchange reserves.

This is also to remind him that in Pakistan there is a huge mismatch between the inflow and outflow of dollars. IMF tranche may have provided a breather, but the quantum of debt servicing is grossly unmanageable.

The brutal fact is that the recent floods have devastated country’s agriculture, displaced millions of people and their rehabilitation requires millions of dollars. If I am right bulk of the aid has come in kind and whatever paltry amounts have come is ’peanuts’ only.

This is to also remind the Minister that higher interest rate and persistent hike in electricity and gas tariffs are rendering Pakistani manufacturers, particularly exporters of textiles and clothing, uncompetitive in the global markets.

It is writing on the wall that imports will go up and exports will come down, widening the current account deficit. Since Dar has no control over imports, Pakistan’s only savior could be exporters. However, the lust to collect more PDL to bridge budget deficit is killing golden-egg layer, textiles and clothing industry.

Although, I am not an admirer of Miftah Ismail, any attempt to portray Dar as savior is like building an empire on the dead body of another person. If the readers are unable to understand this narrative let me say, “Miftah was used to announce all the bad decisions and Dar is being projected as a Savior”.

To conclude allow me to say, “The incumbent government has no clue whatsoever regarding pulling the country out of current economic crisis, all its policies can be termed ‘firefighting’ but the fire is too big and water is too little.”

    

 

  

 

 

 

 

 

 

Bangladesh Forex Crisis threatens macroeconomic stability of the country

According to The Bangladesh Chronicle, like other countries of the world, Bangladesh too is facing volatility in the foreign exchange market. This was initially caused by the demand recovery and supply chain disruptions as battered economies began recovering from the coronavirus pandemic.

The volatility has exacerbated in the last one month because of Russian invasion of Ukraine. This is not only likely to derail the rebound from the health crisis but also bringing about a bigger macroeconomic challenge for Bangladesh.

Maintaining a stable exchange rate of the taka against the US dollar is a populist idea that prevailed in the mindset of both the government and commoners. The same thinking might still be dominating, although the country seems to be facing a far bigger crisis than the pandemic.

Bangladesh Bank seems to be indecisive whether it would go for gradual depreciation of the local currency or opt for a quick devaluation. The situation has been created by the dwindling flow of foreign exchange.

Bangladesh Bank injected a record US$3.78 billion between July 1, 2021 and March 23, 2022 to stop the freefall of the taka, but the initiative has hardly resolved the crisis faced by the dollar-strapped banks.

Although, export earnings are on the rise, this has not been enough to offset the instability in the foreign exchange market led by a steep increase in import payments and a sharp decline in remittance.

Between July 2021 and January 2022, imports grew to US$46.67 billion, up 46%YoY. As against this exports increased 29% to US$27.97 billion. Remittance declined 19.4% to US$16.68 billion.

The imbalance between the inflow and outflow of US dollars has compelled many banks to purchase the greenback from Bangladesh Bank to settle letters of credit for imports.

The central bank is providing dollars to the banks with utmost generosity as the taka would face a major fall if the support is not extended.

The exchange rate now stands at Tk 86.20 per US dollar compared to Tk 84.80 a year ago. This means the central bank has allowed the taka to depreciate in a certain range.

But Ahsan H Mansur, an economist who earlier worked at the International Monetary Fund, describes the central bank’s move as insufficient to ensure macroeconomic stability from the current global turmoil.

“Bangladesh Bank will have to devalue the local currency by Tk 3 against the dollar immediately,” he said.

Higher imports against moderate exports brought down Bangladesh’s foreign exchange reserves to US$44.29 billion on March 23. This is way down from the US$48 billion recorded in August last year.

Economists think the worse is yet to come. This is because the impact of the global supply chain disruption stemming from Russia’s invasion of Ukraine has not fully hit Bangladesh yet.

Businesses usually open letters of credit two to three months before the arrival of imported products. So, the effect of the war will be visible a couple of months later.

 “The crisis in the foreign exchange regime will deepen if the increasing imports cannot be contained,” Mansur said.

He suggested bringing down the country’s import growth below 30% from 46% now or else the reserves will be hit hard by the ongoing instability.

The depreciation risks stoking inflationary pressure to some extent. The official figure of the Consumer Price Index surged to a 16-month high in Bangladesh in February driven by soaring costs of essential food ranging from staples such as rice, edible oil and vegetables to protein items.

“Inflation will increase, but you will have to embrace it for the time being,” said Mansur when asked how the government would tackle the situation.

“We don’t want to become Sri Lanka, which has long been facing a foreign exchange crisis,” he added.

Sri Lanka has been hit with the financial crisis because of a shortfall of foreign currencies. As a result, traders cannot finance imports.

On Tuesday, the country was forced to order troops to petrol stations as sporadic protests erupted among the thousands of motorists that queue up daily for scarce fuel.

“Any delays in taking initiatives to address the existing crisis will deal a fatal blow to the macroeconomic stability,” said Mansur.

Remittance flow through the official channel may reduce further as the exchange rate in the kerb market, an illegal trading spot, is higher than in the banking sector.

A foreign currency trader says that people now have to count Tk 91.80 per dollar, way higher than the Tk 86.20 interbank rate.

The foreign exchange regime volatility has even forced a bank to stop publishing US dollar rates in the last few days since the rates are fluctuating abnormally, said an executive of the lender requesting anonymity.

“If the kerb market continues to offer a higher rate, remitters will opt for the informal channel,” Mansur said.

“This will bring the reserves to a critically low level. So, the central bank should narrow the gap as the subsidy of 2.5% given by the government to beneficiaries of remittances is not adequate,” he added.

Md Habibur Rahman, Chief Economist of Bangladesh Bank, says the central bank has decided to gradually depreciate the local currency.

He thinks the exchange rate gap between formal and informal markets should be Tk 2.50 per dollar to ride out the ongoing situation.

If his view translates into reality, the exchange rate will have to be depreciated to at least Tk 89 per dollar, which is also supported by Mansur.

“The central bank will bring about quick depreciation of the taka to a certain degree since injecting dollars to keep the exchange rate stable is not an ideal stance for long,” Rahman said yesterday.

However, he has not given any hint as to how much depreciation will be allowed.

Another central bank official said the government would try to keep inflation in check in order to protect people from higher prices since the next general election is not far away.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, says the reserves could cover import payments for more than nine months a few months ago, but now it can finance imports for about 5 and a half months.

He calls the gradual depreciation of the taka a time-befitting move.

“The depreciation will bring imported inflation. The government can lessen the woes of the common people by giving fiscal supports such as waiving or reducing taxes and value-added taxes, and providing subsidies to expand open market sales,” he said.

“But such fiscal measures will have an implication on drawing up the next budget,” Rahman added.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says the imports of non-essential and luxury items have to be discouraged as some banks now face foreign currency shortages.