By Mushfiq Ahmad
KARACHI: Exchange rate reforms, including removing restrictions on advance imports and shifting of oil payments to the interbank market, will weaken the Pakistani rupee to 86 against the dollar by June 2010, said Sayem Ali, Economist, Global Markets and Research (Middle East, Pakistan and North Africa), Standard Chartered Bank.
He, however, said that significant balance of payments correction, combined with large foreign exchange inflows on account of IMF, WB and ADB lending, would support Pakistani rupee in the short term. He said the dollar was likely to trade at Rs 80 in the domestic market by June 2009.
The Pakistani rupee depreciated close to 28 percent in 2008 due to a high current account (C/A) deficit and a slowdown in foreign exchange flows. However, a pickup in official foreign exchange inflows seems to have put a floor under the Pakistani rupee. “In the short term, we expect the correction in external balances to support the Pakistani rupee higher, although additional dollar demand due to the movement of oil payments to the interbank market will likely continue to limit the upside,” said the economist in a detailed report.
Over the medium term, the C/A deficit is likely to widen due to a revival in commodity prices. In particular, the oil import bill is expected to increase to $1.8 billion in Q4-2009 from $1.4 billion in Q1-2009.
In such a scenario, commitments to moving oil payments entirely to the interbank market and removing restrictions on advance import payments are likely to keep the Pakistani rupee under pressure – especially as the foreign exchange reserve targets under the IMF’s stabilisation programme limit the central bank’s ability to add to onshore dollar liquidity, he said.
While portfolio outflows and the absence of significant official foreign exchange inflows weighed on the financial account, the narrowing trade deficit and strong inward remittances contributed to the improvement in the C/A. “Though private foreign exchange inflows are expected to slow going forward, we remain sanguine about the BoP outlook due to the shrinking import bill and potential large official foreign exchange inflows,” said the report.
We expect the SBP to lower rates to 10 percent from the current 15 percent by the end of 2009 due to heightened growth concerns, he said.
Though the outlook for private foreign exchange inflows remains bleak, with global risk appetite yet to show signs of a sustained revival, a pick-up in official foreign exchange inflows seems to have put a floor under the Pakistani rupee, he said.
The import bill has declined sharply following the correction in international commodity prices, from $3.6 billion in September 2008 to only $1.8 billion in February 2009. “We expect the import bill to fall to $12.6 billion in H2-FY09 (ends June 2009) from around $18 billion in H1-FY09 (ends December 2008). This, in turn, should help narrow the C/A deficit to $3.8 billion in H2-FY09 from $7.3 billion in H1-FY09.”
Under the IMF programme, the government has committed to removing measures that are distorting the exchange rate and moving to a flexible exchange rate regime by February 2010. This includes moving oil payments (approximately a third of the import bill) entirely to the interbank market and removing restrictions on advance import payments. Daily Times, 3-Apr-09