ISLAMABAD – SBP gross reserves increased by $443 million to reach $8.36billion. The rumor mill linked it to the so-called deal with a convictedpolitician. Earlier this week Governor SBP dismissed the notion by sayingthat the money did not come from an individual.
Here, the attempt is to explain the mechanism of change in flows; and tonarrate that any buildup of SBP reserves through buying in the local marketis manifestation of improved situation in previous weeks/months, as thedealing is mostly in forward position, and it appears on balance sheet(gross reserves) when the forward position matures.
Thus, in simple words, any flows came in the SBP gross reserves in the lastweek of October are probably reflecting better supply in the interbankmarket in preceding weeks/months- in Sep and Oct, and not because ofsomeone getting bail or something in November.
Under the IMF programme, there is a quantitative target of NetInternational Reserves (NIR) (read “The reserves building journeylink”).In order to improve NIR, SBP has to improve the forward swap position whereSBP short position had substantially increased in the last two years or sodue to falling supply of foreign currency in the market. Lately, the supplyof foreign currency has improved in the interbank market, and SBP (SinceJul-19) is buying dollars in forward, and when the positon matures, itstarts reflecting in the SBP gross reserves.
The SBP does not usually buy dollars in spot, and mostly deals in forwardmarket, These are off balance sheet, and come on balance sheet once theposition is squared after maturity. After the sharp currency and interestrates adjustment in Jul-19, the demand of foreign currency fell, thecurrent account deficit reduced, and the foreign portfolio investmentstarted pouring in. All these have resulted in excess supply of foreigncurrency in the interbank market, and commercial banks have become netsellers. Now had the SBP not intervened, the oversupply could have put thepressure on the price of dollar down, but the central bank rightly sopounced upon the opportunity to improve NIR.
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Rest is nitty-gritties- the current account deficit has reduced, but it isstill in red – so based on this, commercial banks should be net buyers.Encouragingly, the portfolio investment in T-Bills is increasing ininterbank market that is offsetting the CAD needs – cumulative CAD inJul-Oct stood at $1.5 billion and part of it is financed by Saudi oilfacility in financial accounts, and a bit from other normal flows includingFDI. A big unprecedented jump came in portfolio investment where $441million came in during Jul-Oct. But adding all those, the supply could notbe net positive of demand.
There is another element – the kerb market, where the buzz is that peopleare net sellers of foreign currency for a few months i.e. those who werehoarding are selling. That is the reason the gap between kerb and openmarket has reduced, and that excess supply has resulted in bringing thedollar value against PKR down from 164 to 155. People sell these toexchange companies which eventually are sold in the inter-bank market, andsince the supply is higher than expected demand, banks are net sellers inforward market. Here, the SBP comes in play to buy in forward to reduce itsforward book liabilities.
