Remittances are relentless lovers of the rupee. They console him, comfort him and support him like nothing else. The rise of the rupee in March encouraged the politically contested PTI government. But as the rise in rupees is mainly due to remittances, the party presents it as proof of the unwavering confidence of the majority of Pakistanis overseas in the leadership of Prime Minister Imran Khan.
But can the rupee continue to march in April-June and even into the next fiscal year? And can remittances continue to grow at the current rate this quarter and into the next year? Markets are busy making projections in the case of banks, smart projections and behaving accordingly.
A year ago, at the end of March 2020, the rupee had traded at 166.70 per dollar on the interbank market. Banks expected it to fall to 168.83 per dollar by June of the same year. The three-month dollar futures price was therefore Rs 168.83.
At the end of March of this year, the rupee closed at 152.76 per dollar in the interbank market. And the three-month dollar futures price was listed at Rs155.48. Things have really changed.
The dollar futures price that banks offer customers reflects their anticipation of exchange rates. They charge a forward premium on foreign exchange transactions to be settled three months, six months or a year, from a given date.
The main reason for the rupee gains is the decline in the current account deficit. But this drop is entirely due to the increase in remittances
Importers reserve dollars in advance to clear their impending import bills. Keeping in mind the trend of the exchange rate movement, banks cite futures prices higher than the spot price. Because even a rising rupee in any given month does not give banks enough confidence to be able to continue rising into the next quarter or beyond. Another reason for charging a term premium is that banks also factor in their own currency liquidity, currency markets, economic risks and operational costs, etc. in their projections.
The futures price of the dollar is therefore not a great indicator of how banks perceive the direction of exchange rates. But the term premium or the overshooting of the current dollar price certainly is. In March 2020, the dollar term premium was lower than it was in March of this year. This means that from the point of view of the banks, there is not as much chance that the rupee will lose its value in April-June 2021.
This shift in perception is widely shared across the spectrum of the financial sector. This is why you are seeing heads of brokerage research projecting that the rupee may gain more value and rise to 150 to the dollar by June.
What then changed the banks’ perception of the rupee-dollar parity? Mainly a dramatic increase in remittances following the launch of Roshan digital accounts in September 2020. These accounts have enabled the Pakistani diaspora to make investments in their country’s debt, equity and real estate markets. origin and generate much higher returns than their host country. countries in rupees or even in foreign currency.
Those accounts drew $ 806 million between September 2020 and March 2021, with $ 212 million in March alone.
When it comes to overall remittances, Pakistan attracted $ 18.743 billion between July 2020 and February 2021, 24.1% more than the $ 15.104 billion it received between July 2019 and February 2020, according to SBP data.
Those who are increasingly concerned about the sustainability of the recent rupee rally are actually trying to determine how long remittances can grow so quickly. The rupee has recovered nearly 8.4% in one year, 4.4% in January-March 2021 and 3.4% in March alone.
In addition, there are a few other concerns: Even if remittances continue to grow so rapidly, can this support the rise of the rupee for a longer period against a backdrop of negative growth in exports of goods and services? (based on FOB value)? What will be the impact of the appreciation of the rupees on the import bill? And how will the inflated import bill due to a higher rupee affect exports of manufactures that depend on imported raw materials?
A few other things also disturb a curious mind: Could the rupee have risen backed by stronger remittances if the government had not accumulated more external debt, including $ 2.5 billion from Eurobonds recently? launched? Will the growing stock of external debts and liabilities not increase external debt service, especially since Eurobonds have been sold at very high yields? And will that not have an impact on the overall balance of payments (BOP)? By the way, Pakistan’s current account deficit and balance of payments deficit have not entirely disappeared: they have just shrunk considerably. In July-February 2020-2021, the current account deficit and the balance of payments deficit are reduced to $ 881 million and $ 764 million, respectively, compared to a year ago.
These are important questions and their handling requires the utmost caution on the part of the Ministry of Finance and the central bank. Hopefully, the new finance minister, Hammad Azhar, and the SBP governor, Dr Reza Baqir, will work in close coordination to resolve these issues.
The decline in the current account deficit to just $ 881 million in July-February 2020-21 is undoubtedly the main reason for the rise in rupees. But this drop was entirely due to the increase in remittances alone.
The country’s total exports of goods and services actually fell to $ 19.87 billion in July-February, from $ 20.25 billion a year ago. Total imports of goods and services, meanwhile, climbed to $ 37.29 billion from $ 35.72 billion, SBP data shows.
As the rise of the rupee and the ongoing economic recovery are expected to increase import bills for goods and services, there is a critical need to increase exports of goods and services. Otherwise, the current account deficit could start to increase again from the following year, slowing the rise of the rupees.
The IMF relaunched lending after a long hiatus under a $ 6 billion BOP support package, and Pakistan received another $ 500 million tranche. Central bank foreign exchange reserves now total $ 13.67 billion, well above $ 10.84 billion a year ago. Things in the external sector look good.
But to make them prettier, Pakistan will have to work harder.
Posted in Dawn, The Business and Finance Weekly, April 5, 2021
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