Growing exchange rate challenges

By Mohiuddin Aazim
Published in DAWN on January 24, 2022

In six months and 20 days of the current fiscal year (between July 1, 2021, and Jan 20, 2022,) the rupee has lost 12 per cent value against the US dollar. On June 30 last year, the rupee closed at 157.54 per dollar in the interbank market; On Jan 19, 2022, it finished the day’s trading at 176.49.

A rising trend in international fuel oil prices has made exchange rate management all the more challenging for Pakistan, already struggling to contain its current account deficit. The country reported about $9.092 billion current account deficit for July-Dec 2021, against a $1.247bn surplus in a year-ago period.

Rising oil prices are sure to mitigate imports, dampening the effects of the recent monetary tightening besides neutralising the effect of hiking import duties on more than 140 non-essential items. Growth in remittances has started weakening; persistent energy shortages and dramatic withdrawal of incentives from key export sectors threaten to reduce export growth.

Imports of petroleum products more than doubled and crossed $10bn in July-Dec 2021 from less than $5bn in July-Dec 2020

Nine top-tier trade and industry lobbies claim that industries, including export-based industries in Karachi, the commercial and industrial hub of Pakistan, are braving “zero or reduced gas pressure for almost 16 hours a day”. And all this is happening at a time when Pakistan’s first-ever national security policy admits that making the country’s economy continually stronger is a must for the nation’s security.

On Jan 19, oil hit a 7-year high of $88 plus per barrel amidst tightened supplies from oil-exporting countries and growing geopolitical unrest in the Middle East following an attack by Yemen’s Houthis on the United Arab Emirates.

A decline in workforce export in 2020 and 2021 is already showing its lagged impact and is bound to reflect in remittances’ flow — a little over 225,000 and 288,000 Pakistanis went abroad for jobs in 2020 and 2021 respectively against 382,000 in 2018 and 625,000 in 2019

The Organisation of Oil Exporting Countries (Opec) expects that total world oil demand in 2022 would see an increase of 4.15 million barrels a day despite the Omicron threat.

If the Opec estimate turns out to be true and if its policy to keep oil supplies tight (to avoid a price crash) continues then Pakistan’s already fat import bill would become fatter. Overall goods’ imports surged 66pc in July-Dec 2021 to about $40.65bn from a little over $24.45bn in July-Dec 2020, according to Pakistan’s Bureau of Statistics.

Imports of petroleum products more than doubled and crossed $10bn in July-Dec 2021 from less than $5bn in July-Dec 2020 — on the back of higher international oil prices and larger import volumes of refined petroleum products (instead of crude oil). Whether Pakistan can reduce its overall imports bill during Jan-June 2022 depends chiefly on how effectively the government will cause a shift in imports from refined petroleum products to crude oil and whether global oil prices would show any sign of easing.

Against $40.65bn imports during July-Dec 2021, exports stood around $15.13bn. This created a huge deficit of $25.52bn — more than double the deficit of $12.34bn in July-Dec 2020. Obviously, neither such a large trade deficit can be narrowed significantly during Jan-June 2020 nor the consequent widening in the current account deficit can be avoided —particularly when growth in remittances has already started slowing down.

The rupee may inevitably lose more value against foreign currencies, more so because the central bank is following a non-interventionist exchange rate policy — and more importantly it does not have enough forex reserves to pump into the forex market. (Liquid forex reserves held by the State Bank of Pakistan (SBP) has been on the decline for the past six weeks. On Dec 3, these reserves totalled $18.658bn but on Jan 14 they touched a new low of about $17.036bn — not enough to cover even three months of the merchandise imports bill.)

Home remittances of 15.8bn in July-Dec 2021 represent only 11.3pc year-on-year growth or less than half of the 24.9pc growth witnessed in July-Dec 2020. Can this rate of growth be accelerated during Jan-June 2022?

Well, that is a possibility. But not quite certain.

That is possible because the government has recently launched an exclusive housing scheme for Pakistanis living abroad and that may attract some additional amount of remittances. It is also possible because inflows in Roshan Digital Accounts continue to rise as more and more overseas Pakistanis are opening these accounts. At the end of June 2021, the number of these accounts totalled 181,556 and the amount received through them stood at $1.05bn. At the end of December 2021, the number of accounts jumped to 322,463 and inflows rose to $2.149bn, SBP stats show.

However, higher growth in remittances during Jan-June 2022 remains uncertain. A decline in workforce export in 2020 and 2021 is already showing its lagged impact and is bound to reflect in remittances’ flow in the future. A little over 225,000 and 288,000 Pakistanis went abroad for jobs in 2020 and 2021 respectively against 382,000 in 2018 and 625,000 in 2019, according to the Bureau of Emigration and Overseas Employment.

Further acceleration in remittances’ growth also remains uncertain because abrupt withdrawal of Withholding Tax exemption from foreign exchange companies is encouraging informal channelling of remittances via Hundi/Havala. Besides, a sizable amount of foreign exchange held privately in Pakistani has started landing in Afghanistan thus creating a shortage of hard currencies in the open market. Traders in forex-starved Afghanistan are buying dollars from Pakistani currency hoarders and speculators at premiums to pay for goods and services imports from Pakistan, say officials of the Exchange Companies Association of Pakistan (ECAP).

The association has brought this to the notice of the SBP and the government. ECAP officials say the problem can be tackled by luring those operating in the black market to set up licensed forex companies.

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