Rupee strengthens by about two percent versus dollar in July-October

KARACHI (November 11 2002) : The rupee in July-October 2002 period strengthened by approximately 2 percent against the dollar after continued flow of dollars from overseas Pakistanis, rise in foreign direct investment and loans from the international financial institutions.

Rise in remittances not only improved the Pakistan's currency but also helped the foreign currency reserves to show tremendous boost in the four months ended on October 31, 2002. The reserves rose by $1.443 billion or 20.32 percent to $8.543 billion. The central bank held $6.365 billion and other banks $2.178 billion.

The rupee in four months rose by 1.99 percent at the open market and breached the barrier of Rs 59 to a dollar, finishing at Rs 58.95 on Oct.31, 2002 from Rs 60.15 on July 1, when the new fiscal year started. Similarly, at the inter-bank market it was quoted at Rs 59.10 on Oct. 31, 2002 and Rs 60.05 on July 1, 2002.

The rupee since September 2001 has improved by 12 percent in the open market and 7.7 percent at the interbank market. All of this set the basis for accelerating liberalisation of the foreign exchange market and particularly the removal of segmentation between the interbank and the kerb markets.

The trend changed dramatically. The central bank in the year ended June 30, 2002 and in four months to October 31, 2002 purchased dollar from the inter-bank to ensure that the stable exchange rate did not erode the competitiveness of Pakistan's exporters.

The strengthening of dollar and crack down on Hundi network forced the expatriates to send their remittances through the banking channels. In three months to Sept. 30, 2002, remittances rose almost three-fold to $1.052 billion from $340 million of the same period corresponding year. Experts hope that the remittances would reach the coveted $3 billion in the current fiscal year from $2.2 billion attained in the preceding fiscal year.

The downward slide is likely to increase its pace due to the increasing remittances, prospects of debt rescheduling, high grants and aids and Foreign Direct Investment (FDI), which will further support the rupee in the long term, BMA Capital Management in its monthly report said.

Two major developments which are likely to improve the country's image at the international level include: (i) Debt Management and Reduction Strategy (ii) Foreign Direct Investment. These developments will not only improve the country's credit worthiness but will also restore confidence of international investors. Furthermore, the Standard and Poor's re-affirmation of the foreign and local currency debts will also have a positive impact on the economy of Pakistan.

The debt reduction is likely to continue due to debt rescheduling of $12.5 billion by Paris Club: The rescheduling is likely to have a positive impact on the forex reserves as Paris Club creditors own 37.5 percent of the country's outstanding debt obligations. It will enable Pakistan to reduce its debt servicing to $3.5 billion for the current fiscal year as against $5 billion incurred last year.

The government is also making efforts to get a debt swap for its entire bilateral loans of $12.5 billion rescheduled under Paris Club.

Government's focus on retiring expensive short-term commercial debt -as reflected from the retirement of $ 1.9 billion during FY 02 and the target to retire is $3 billion for FY 03. With the retirement of this expensive debt the overall cost is falling from 8-10 percent in the past to 5-6 percent currently.

Appreciation of rupee is likely to further reduce the debt payments in rupee terms. Declining interest rates in the economy which will reduce the cost of funding for domestic debts.

Another positive development during the last few months has been the improving Foreign Direct Investment (FDI) in the country which increased to $170.2 million from last year's $69.1 million, up by 146 percent for the first quarter (Jul-Sept) of the current fiscal year.

The expectations are that if the government policies and the political situation remain stable, the FDI for the current year is likely would touch the mark of $ 1 billion. The factors supporting FDI in the country include: The improving economic indicators; Higher forex reserves of the country; improved position to meet its debt obligation; and greater access to international markets are likely to create a favourable business environment.

Furthermore, the efforts being undertaken by the Board of Investment (BoI) of Pakistan and the government to restore investor confidence are likely to make Pakistan an attractive investment area for foreign countries and institutions. Increasing investor interest is evident from the higher participation of the foreigners in the privatisation of state-owned enterprises.

Traditionally, FDI to Pakistan came from UK and US predominantly. However, recently we have seen increasing interest from Middle East for example in the acquisition of UBL and in the on-going privatisation of PSO. Increasing economic and political stability in Pakistan, coupled with geopolitical changes taking place in the region are likely to make Pakistan an attractive destination for FDI from Middle East.

Thirdly, the expatriates living abroad have been sending excess cash in the form of remittances, which totalled to $2.4 billion, up by 119 percent for FY02. Stable political environment and low interest rates are likely to encourage investments by non-resident Pakistanis.

Fourthly, if the reconstruction begins in Afghanistan, foreign companies are likely to be interested in various projects in numerous sectors including, power, energy, infrastructure etc.

Thus, the upward trend of the rupee is likely to continue due to the above-mentioned developments. Furthermore, the interest rate cut in US by 50-basis point is likely to exert further upward pressure on the appreciating Rupee if interest rates in our economy are not reduced proportionately, the report of the BMA said.

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