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Pakistan sees dollarisation; SBP is ready to calm market

Has dollarisation of the Pakistani economy started? It may be happening on a small scale, but it seems to be on its way. Surprisingly, the current vote-getting campaign for May 11 National Parliamentary elections, has somewhat slowed the rupee depreciation.

The demand for rupees has gone up to fund the electioneering. Nonetheless, the demand from hard currency holders and those who wish to shift their funds abroad stays high.

Rupee has depreciated 56 per cent, during the just-ended five year misrule of Pakistan People Party (PPP) due, principally to mismanagement of the economy, and other domestic and foreign factors. The dollar which was trading at Rs62 in 2008 — when PPP came into power — touched Rs100 last week.

But over the weekend dollar eased to Rs98.26 in the inter-bank market. In the open market dollar eased to Rs98.90 for buying and Rs99.10 for selling.

The rupee has been declining, with occasional days of stabilising. But one has to watch in future, specially if heavy dollarisatrion sets in, and persists.

The currency market speculations, the forthcoming elections, overall political and economic instability, the rising prices of food and consumer goods, and a likely inflationary bout, are persuading people to go for the Greenback and convert their rupees into hard currencies.

Who is involved in dollarisation? As of now, the currency market points to big multinational businesses, small and medium enterprises belonging to a range of industries and businesses, and small traders. An increasing number of big and rich are also in the market for dollars.

A good deal of the currency market volatility has been unleashed by successive repayments of IMF loans in recent months. Pakistan had contacted $11. 2billion as Stand By Arrangements (SBAs) in 2008, against which it is currently making the repayments.

There is a great deal of volatility in the currency market relating to foreign debt repayments. In view of this, State Bank of Pakistan (SBP), the central bank, is directing the domestic and foreign-based banks and forex exchange companies to bring transparency in their transactions. SBP, through several directives, has ordered the banks and forex exchange companies to adhere to its regulations regarding operations of private foreign currency accounts and to ensure that these are not used for commercial or business purposes.

SBP has directed the corporate bodies and legal entities that they should not obtain or generate foreign currency from the kerb market for depositing in their foreign currency accounts. But, kerb market operators and currency dealers says “due to the widespread prevalence of such practices, the central bank will find it difficult to reverse the tide of dollarastion.”

Pakistan has two forex markets: the inter-bank market and the open market or kerb. The inter-bank market caters to business-related requirements both of companies and individuals. The open market or the kerb, caters to common people and meets their requirements like travel. The companies and business entities can channel their foreign forex transfers and funds into their Pakistan-based foreign currency accounts. They are not permitted to provide or sell these funds into the open or the kerb market, in order to prevent sale and the ensuing volatility in the open market.

In-spite of these restriction, a large number of companies break the rules. Under the present forex rules, importers are required to open their Letters of Credit with a regular bank to pay for their imports. In violation of these rules, a very large number of importers are currently buying dollars in the open market, rather then from the inter-bank market. How do these importers benefit by such practices?

“By bribing the Customs officials, such importers can bring in fewer items than declared, thereby not only hedging against the price of the items, but also hoarding the remaining amount in their foreign currency accounts abroad,” one report says.

Dollar buying for deposits in the private Forex accounts inside Pakistan, had reached an all-time high during the last few days, currency dealers say. According to SBP, dollar holdings in the commercial bank accounts crossed $5 billion — which is an all time high. SBP forex reserves slipped down to $7.2 billion at end-Mach.

Malik Bostan, chairman, Forex Exchange Companies Association of Pakistan, said: “We have seen a very high demand for dollars before the PPP Cabinet went out of office on March 16. But, now the Rupee is in high demand, which has significantly slashed the dollar demand and prices in the open market. Spending on election campaign requires local currency while politicians like to keep their savings in dollars. Now even the dollar is being sold in the market for cash in rupees.”

“But local currency has found other attractions in Pakistan. Rupee has found sugar, raw cotton and equity stocks more attractive, compared to dollars,” said Anwar Jamal, a currency dealer. “Prices of sugar and cotton are going up which has attracted investors as their yields are also higher than the US dollar. Rupee is also in demand for investment in equity market as bourses are very buoyant at the moment.”

Benchmark Karachi Stock Market KSE-100 index was at all time high of 18,714.28 over the weekend. Real estate is also attracting investment. Such are the ways, the Rupee moves up and down. But this being the current health of the rupee, what will future bring forth? Only the coming weeks will tell.

Views expressed by the author are his own and do not reflect the newspaper’s policy