. .

SBP's good governance over exchange rate

Despite hardly any inflow from multilateral lenders, Pakistan has been able to minimize exchange rate volatility

Sep 11 - 17, 2000

The fund flow to Pakistan from multilateral lenders was suspended in May 1998 has not been fully resumed as yet. Despite this the country has been able to contain volatility of its exchange rate, make payment in time and finance imports to a large extent. This success may be partly due to rescheduling of its external debts but mainly due to stringent forex management policy followed by State Bank of Pakistan (SBP).

Some analysts say that the SBP has been following very strict controls on forex movement. But was it not the only reason that a respectable exchange rate has been maintained over last 25 months. At times there was some pressure but forex management policy and timely intervention by the central bank has helped in containing volatility of exchange rate and also discouraging dollar accumulation.

Many analysts did not appreciate the policy of the SBP buying dollars from the kerb market to intervene. They feared that the policy would cause unprecedented high rate of inflation in the country. However, nothing of such sort really happened. Many economists are unable to understand the contradiction in theory and practice. To understand this it is necessary to have a closer look at the state and composition of the economy of Pakistan. It may be true that informal economy in Pakistan is very strong and is growing at a very fast pace. But it is also a fact that the large scale manufacturing sector suffers from poor capacity utilization. With the influx of surplus liquidity, purchasing power of those, who suffer from conspicuous consumption, improved. All their expenditure were income for various sectors of the economy. The increased demand also helped in improving capacity utilization of manufacturing sector, both large scale and small scale. Therefore, the rate of inflation has not gone all that high as expected by conservative economists.

Despite the fact that exports are still low as compared to the target, imports have not gone out of proportion. In reality, the import of various commodities has come down. These include wheat, edible oil and fertilizer. While the price of crude oil and finished products have registered persistent upwards trend, they have not caused any pressure on forex reserves. This was mainly due to availability of financing facility from Islamic Development Bank and suppliers.

Another factor which has lessen the pressure on forex reserves is availability of surplus exportable commodities. These include fertilizer (urea), PTA and polycotton products. Some of these products were never exported in any substantial quantity in the past. The same trend is expected to follow in the coming months with the addition of raw cotton. For the 2000-2001 season, cotton output is estimated around 16 million bales. Even if there is some natural calamity the output is expected to be above 12 million bales.

In the recent past there was also enhanced inflow of foreign investment in capital market as well as direct foreign investment. The parent company has enhanced its stake in Shell Pakistan, Imperial Chemical Industries enhanced its equity in ICI Pakistan and British Tobacco Company has increased its equity through underwriting the rights issue of Pakistan Tobacco Company. Foreign investment has also come in PARCO. The Asian Development Bank has extended funds for KESC. All these amounts may be small, when taken in isolation, but had a very positive impact on the inward forex movement. Since shares of most of the blue chips are selling at discount at present, the inflow under portfolio investment is expected to increase substantially in the coming months.

Apart from the above mentioned points another factor which has brighten the prospects of raising forex through privatization, is the keen interest of foreign investors in the privatization process of LPG business of PSO, SSGC and SNGPL. While one may have many reasons to believe that the bids were low, they are attractive keeping in view Pakistan's present economic scenario.

Despite all this there should be enhanced efforts to make funding arrangements with the IMF at the earliest. Although, the amounts actually disbursed by the IMF may not be very substantial but it will pave the way for release of funds from other multilateral lenders.

It is imperative for the lenders to take into account the fact that Pakistan has not only managed to live without any major funding from outside the usual one and it is also current on payments. Despite the most adverse conditions, the performance of the economy is not far from the targets usually set by the IMF.

It is also necessary that the economic managers of Pakistan should also realize the need to remodule the economy, redefine the objectives and make efforts to achieve the new targets. The economic stability can only be achieved through higher production and productivity and greater value addition. The targets set by the present government are achievable. Textile industry seems to have taken the initiative others should also follow them.