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Pressure on remittances will stay up; rupee depreciation good for exports and economy

Pressure on remittances will stay up; rupee depreciation good for exports and economy

FDI has better future, saving culture needs improvement
Interview with Syed Farhan Karim — Vice President, Equity Sales Arif Habib Limited

Profile:
Syed Farhan Karim is associated with Arif Habib Limited for over twenty years and currently holds position of VP Equity Sales. He has got a Master’s Degree in Business Administration. He is an experienced Capital Marketer with strong leadership and relationship-building skills. He is mainly engaged in client-focused equities sales. He is a thorough financial advisor and is excellent at juggling multiple tasks and working under pressure. His broad industry experience includes Trading, Fund/Portfolio Management, and Research.

PAGE: What are your views on the impact of the rupee depreciation on exports?

Syed Farhan Karim: International Monetary Fund (IMF) expects that Pak Rupee is overvalued by 20 percent on the basis that Pak Rupee’s Real Effective Exchange Rate (REER) is much higher than Nominal Effective Exchange Rate (NEER). The devaluation of the currency is likely to have a positive impact on exports. This will enhance the falling exports and boost the deteriorating current account balance. Moreover, it will also dampen demand which would ease off pressure of import bill. In theory, rupee depreciation bodes well for exports and it is likely to increase the revenues of export-oriented companies, especially textile sector. However, structural changes are needed in order to compete regionally for instance provision of cheaper gas and electricity for the export industry, support to the farmer community (support prices, removal of duty on import of raw materials) and protection from imports, to name a few.

Moreover technological advancement in the textile sector is important for incremental exports. Due to the incentive package, less interrupted supply of energy and growth in large scale manufacturing, our export of textiles is already growing. Exporters are also trying to improve their own manufacturing and marketing capabilities to become more competitive in the world market. After the rupee depreciation, weaker economy will grow and ease the balance of payment. On the other hand, rupee depreciation is sure to boost the cost of external debt financing. But this will be offset by revenue achievement of economic growth of GDP above 6 percent.

PAGE: Your views on the remittances and investment in Pakistan:

Syed Farhan Karim: Annual remittances have shown a slight decline YoY in 2017 from US$19.9 billion in 2016 to US$19.3 billion in 2017. Almost 10-month data reflect total remittances at US$16.5 billion and with an expected inflow of $3.5 billion in last two months, the total remittances are expected to stay above $19 billion.

Over last year, the situation in Middle East has deteriorated resulting in job redundancies and layoffs, especially for expat workers. In the event of further worsening, the pressure on remittances will increase. Remittances have not seen any growth since 2016. Meanwhile, foreign portfolio investment in Pakistan is dependent on investor confidence with key short term triggers such as the upcoming elections as well as Pakistan’s potential entry (or not) in the Financial Action Task Force (FATF) black list in June 2018.

Foreign Direct Investment, on the other hand, has been on the increase mainly from China and went to power sector projects lately. In the second phase of CPEC, we expect FDI to improve further.

 

PAGE: Your views on the saving culture in Pakistan:

Syed Farhan Karim: The country’s gross saving to GDP ratio remains lowest in the region in 2016 at 8.7 percent compared to 28.9 percent of India, 46.5 percent of China and 9.0 percent of Afghanistan. Year over year high inflation, poor growth in disposable income and lack of job opportunities for burgeoning youth are factors affecting saving rate.

PAGE: How would you comment on the economy of Pakistan?

Syed Farhan Karim: At present the economy is set to achieve its 12-year high GDP growth rate with target for next year (FY19) at 6.2 percent. We believe factors such as international oil prices and its impact on inflation, growth in large scale manufacturing, import policies, control of twin deficits, successful completion of CPEC projects, safe level of FX reserves and timely repayment of foreign debt remain key for future growth. With raising interest rate and expected rupee devaluation, the aggregated demand is likely to be curtailed, which is expected to slow down GDP growth.

PAGE: Kindly tell us about the cost of doing business in Pakistan:

Syed Farhan Karim: A key determinant of the cost of doing business is energy cost. In Pakistan, as per the World Bank, energy cost is around US cents 18.8 per KWh compared to 9.2 in Bangladesh, 12.7 in China, 14.9 in Afghanistan and 20.3 in India. So barring India, our energy cost remains uncompetitive regionally. Albeit, with the government focusing on several low cost power projects (including some renewable energy projects), generation cost in Pakistan is expected to come down eventually by 40%.

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