ISLAMABAD – Net rise of $3.75 billion in reserves to take Pakistani Rupeenear Rs 145 against US dollar.
Since July, the SBP reserves have increased by $1.8 billion whileswap/forward liabilities are down by $1.95 billion. The commutativeincrease in Net International Reserves (NIR) is at $3.75 billion. That is ahealthy sign. This indicates why the currency appreciated from its low ofRs164/USD to Rs155/USD. The interbank market is having excess foreignexchange liquidity and the currency may appreciate by another 2-3 percentin a few weeks’ time, Business Recorder has reported.
Some say that the SBP should buy excess liquidity to create reserves bufferand should not let the currency appreciate. Seeing the past four months’data, the currency appreciation would have been higher if the central bankwas not buying dollars from the interbank market. The process is likely tocontinue, but some liquidity will be deliberately left in the interbankmarket for banks to learn to deal independently.
Earlier (2016-18), the SBP used to supply the shortage of funds in theinterbank market to keep currency intact. There is a consensus that it wasa flawed approach. Similarly, sweeping all the amount from the market isalso flawed thinking. For exchange rate to be market determined, market hasto be developed. The banks have to work for parking excess liquidity andthese learnings will be handy in days of shortage.
The mindset has to shift from fixation of currency parity. No defined levelis necessary. It is a pricing measure and should move in both directions,based on fundamentals and demand supply dynamics.
The currency is appreciating because market thinks that early depreciationwas a little too much. Economic fundamentals have improved. The currentaccount deficit is in control, and other foreign flows are pumping in. Animportant indicator is the forward market. The interest rate differentialbetween Pakistan and trading partners to determine the forward spread – itis around 11 percent based on KBOR and LIBOR.
The forward cover is falling as exporters are trying to book orders inforward market. Earlier the exporters were delaying the proceeds. They haveto bring it back in six months. The expectation was of currencydepreciation and exporters were delaying. Now with currency appreciating,not only the backlog is falling, the orders are also sold in forwardmarket. The influx is high.
Importers are trying to exhaust the credit limits to delay payments. Thatis increasing the flows too. Sooner or later, the cycle is to normalize andexcess flows to diminish. The overall liquidity will be better, due tolower current account deficit. The portfolio investment is adding up to theinterbank market liquidity. The amounts coming from ADB, IMF etc godirectly to SBP and market liquidity is likely to remain unchanged.
The payment pressures starts building from 3rd or 4rth quarter of thisfiscal. The SBP might not be providing excess liquidity in the market tosupport currency. At that time, PKR may depreciate. Banks need to createtheir own buffers to handle shortage.