The US dollar rose by Rs4 to a seven-week high of Rs165 in four trading sessions since first working day after Eid holidays, but then fell back to Rs163.5 by Thursday morning.
This volatility in the exchange rates may have kept traders and consumers on their toes, but the central bank’s governor says the recent fluctuation in dollar rates was a normal activity, just like what happens in all commodity markets.
The extraordinary rise in dollar rates depends on whether Pakistan’s external financing needs have been met or not, Reza Baqir said during a webinar, Pakistan Economy: Post Covid 19, Central Bank’s Perspective, on Wednesday.
“We have more than adequately covered our needs,” he added, backing up his statement with a graph showing a buffer [total dollar reserves minus foreign payment obligations] of more than $10 billion as of February or just before the coronvirus pandemic choked the economy.
However, that buffer has since dropped to about $7 billion as of March, the first full month of lockdown in which exports fell 24% and remittances dropped 5%. Market analysts have warned that our dollar reserves could come under pressure as outlook for exports, remittances and foreign investment is negative.
In a recent report on COVID-19’s impact on the economy, the State Bank of Pakistan itself pointed to a possible devaluation of the rupee in case the lockdown extends.
However, Baqir said the central bank is not anticipating any big fluctuations. Referring to the recent hike in dollar rates, the governor said it is normal for prices to move up or down based on demand and supply when the rates are market-based.
Giving examples, Baqir said last year, the dollar started rising and people speculated very high rates, but as dollar inflows improved, the rates came down again. The same happened in late March and early April so some fluctuations are not unusual, he said.
“We keep an eye on big disorderly movements. That’s when we intervene,” he said.
Pakistan’s main sources of earning dollars are exports and remittances. Exports have dropped and financial institutions have already warned that global remittances could drop 20% because of the global economic slump caused by the spread of the coronavirus.
Pakistan secured emergency cash support of $1.4 billion from the IMF and the group of 20 wealthy nations deferred our loan payments till December, which helped keep our exchange rates stable in May.
However, the dollar rose sharply, starting last week. The greenback’s upward flight continued into this week before it dropped again in the last two sessions.
When the dollar rises, exporters hold their payments to benefit from higher rates and importers try to make payments fearing it may rise further, says Zafar Paracha of the Exchange Companies Association of Pakistan, implying that some of this rise was speculative.
“If exports fell, imports, which are more than double of the former also fell,” Paracha said, adding that the import of oil also reduced significantly. Overall, it will benefit the country’s balance of payment situation as our trade loss will reduce, he said.
Baqir also said the country is presently getting the benefit of a cut in oil imports, which is more than compensating for the loss in exports. “Our export orders are gradually increasing slightly,’ he said.
Referring to falling remittances and a negative outlook, the governor said if overseas Pakistanis are laid off, it is not in our control. “What’s in our control is we will increase incentives to get expats to use formal channels more,” he said, adding that Bangladesh benefited from a similar policy.
The governor was also optimistic about the growth of revenue of Pakistan’s freelance community that will support dollar reserves.
The SBP is considering opening new financial channels for the Pakistani diaspora abroad. The purpose is to facilitate expats, engineers and doctors, for example, who have significant savings to invest, which will eventually support the country’s foreign exchange reserves, he said.