Pakistan Currency and Foreign Reserves in Sharp Decline

Pakistani rupee has sharply declined to 109.50 rupees to a US dollar, a loss of nearly 10% of its value in just a few months since Mr. Nawaz Sharif was sworn in as Prime Minister in June, 2013. At the same time, the foreign exchange reserves have plunged to $3.463 billion, a 12-year low since November 2001 when country had foreign reserves of $3.5 billion.

The drop in rupee and foreign exchange reserves is happening in spite of the fact that remittances from overseas Pakistanis are setting new record highs and IMF bailout funds are also being disbursed.

Overseas Pakistanis Remittances:

Overseas Pakistanis have sent home over $55 billion since 2008-9. Last fiscal year alone, expatriates remitted about $14 billion. Additional $ 5.3 billion in remittances have flowed in the first four months (July-October) of the current fiscal year 2013-14, a increase of 6.27 percent over the same period last year.

Foreign Direct Investment:

Net foreign direct investment (FDI) has surged 13.3 percent to $424.9 million in the first four months (July- October) of the fiscal year 2013-14 versus $375.1 million received in the same period of last fiscal year, according to the State Bank of Pakistan as reported in the media.

IMF Bailout:

Pakistan has received $550 million from $6.6 billion bailout package agreed in September this year.

Tweet From Geoffrey Langlands,
 teacher of the ruling Lahore Elite at Aitchison
Policy Inaction:

Economist Sayem Ali was quoted as saying by Pakistani newspaper Express Tribune that sharp decline in foreign exchange reserves resulted from large oil import payments and external debt repayments. “Aggressive monetary tightening, higher import duties and cash margins on imports would have eased the pressure on foreign exchange reserves. However, the government has so far not shown any urgency to arrest the decline in reserves,” he said.

Another Lost Decade?

Economic mismanagement by Nawaz Sharif's economic team brings back memories of the lost decade of 1990s when economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s total public debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% and 264.8% respectively in 1998) and India (44.0% and 358.4% respectively in 1998).

After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class. Pakistan's savings rate  reached historic high of 17.6% of GDP in 2004 and remained above 15% during Musharraf years. It has now plummeted to a new low of just 4.36%.

Pakistan Savings Rate as Percentage of GDP Source: World Bank

The best one can hope for is that Nawaz Sharif and his finance minister Ishaq Dar have learned from their past mistakes and they will try and do better this time around.  I expect it'll be a lot tougher now because of other major issues such as terrorism and energy  which also require a lot more attention.

Here's a video discussion of Pakistan's economy and other current affairs, including Indian elections:

Pakistani Economy under Nawaz Sharif; PTI Dharna; Indian Elections from WBT TV on Vimeo.

Related Links:

Haq's Musings

Pakistan to Beg and Borrow Billions More in 2013-14

Power Companies Profits Soar at Taxpayer's Expense

Does Nawaz Sharif Have a Counter-terrorism Strategy?

Pakistan's Tax Evasion Fosters Aid Dependence

Pakistan's Vast Shale Oil and Gas Reserves

Pak IPPs Make Record Profits Amid Worst Ever Load Shedding 

Global Power Shift Since Industrial Revolution

Massive Growth in Electrical Connections in Pakistan

Finance Minister Ishaq Dar's Budget 2013-14 Speech


Riaz Haq said…
Here's an ET report on Ishaq Dar begging US to release CSF funds to Pakistan:

With its foreign currency reserves hitting the dangerously low level of $3 billion, Pakistan has requested the United States to expedite the process of releasing about $900 million on account of services that Islamabad has rendered in global fight against terrorism.
The request to disburse dues on account of the Coalition Support Fund (CSF) was made by Finance Minister Ishaq Dar on Thursday during a meeting with Washington’s Ambassador to Islamabad Richard Olson. He urged the US to release the outstanding dues in order to avoid the looming threat of default on international payments.
“Early reimbursements of dues on account of Coalition Support Fund… will help Pakistan in improving its present foreign exchange reserves position,” Dar was quoted as saying in an official handout, issued by the Ministry of Finance.
But while the urgency to secure the release of CSF dues builds up on one hand, Dar’s request could not come at a more inopportune moment.

As the minister implored the US envoy to fast track the release of the fund behind the closed doors of Q Block, the workers, office bearers and parliamentarians of Pakistan Tehreek-e-Insaf were staging protests barely a few hundred yards away, outside the Parliament House, demanding the government stop the passage of Nato supplies through the country in retaliation to continuous drone strikes in the tribal areas.
The US Ambassador, meanwhile, remained non-committal about the timing of the release. An official handout stated that Olson assured the Finance Minister that he would convey Pakistan’s position to the US government.
According to the State Bank of Pakistan, the country’s foreign reserves have plunged to $3.05 billion as of November 29 – a sum sufficient to back an import bill of just three weeks. The reserves held by commercial banks stood at $5.19 billion, said the SBP. The outflows were not matching with the inflows due to heavy repayments to the IMF and other international lenders, and delays in taking certain policy decisions which the World Bank and the Asian Development Bank have demanded be implemented before release of loans.
The IMF has so far given only $547 million while another tranche of roughly the same amount is expected to be approved by the lender’s executive board before the end of this month.
For the current financial year, Pakistan has budgeted $1.2 billion on account of CSF. However, the US has so far disbursed only $322 million. Around $900 million remain outstanding. Pakistan hopes to receive at least $300 million more in coming weeks.
It is not yet clear whether the Obama Administration has notified the Congress about releasing another tranche to Pakistan on account of CSF. The administration is required to give a 15-day notification before it can release the amount. Christmas and New Year holidays in the US will start from December 23, which may adversely affect Pakistan’s bid for early disbursements.
Riaz Haq said…
Here's a excerpt of Pakistan budget analysis by Nadeem Haq:

Pakistan’s provinces, where much of the welfare and infrastructure lies, are all running balanced budgets as required by the constitution. The federal government has obligations to smaller regions that it administers, such as the federally administered tribal areas (Fata), Gilgit-Baltistan and Azad Jammu and Kashmir, but these don’t even account for 1% of GDP. The much maligned defence accounts for 3% of GDP, which may not be as large as it seems given that the country is at the forefront of the war on terror. The running of the federal government only accounts for about 1.5% of GDP. Debt service obligations account for the largest chunk about 4% of GDP. All in all, the federal government does not appear to be a spendthrift locked up in colossal administrative and defense expenditures that cannot be reversed. Where then is the problem?

The federal deficit borders on about 8 to 9% of GDP. Our revenue is only about 9% of GDP. Adding up the above mentioned items, our expenditure commitments are only about 9.5% of GDP. Our deficit should then be about 1% of GDP at most, rounding out errors.

Well the government wants a public investment programme, also known as the Public Sector Development Programme (PSDP), which accounts for about 3% of GDP. Can this be contained? Used more wisely? Absolutely.

For years the PSDP has been used as a slush fund by all political factions, politicians, dictators, defence establishment, and the bureaucracy. There is a rush for development without purpose. Indeed, much of it is brick and mortar with a low rate of return and often times developed for non-economic ends.

But the other major drain the budget is the public sector enterprises, especially in the energy sector. Over the years, the PSEs have been enmeshed in administrative bureaucracy and often used for their own slush funds and repositories of perks. The DMG gets positions in boards and often even as executive heads of the PSEs. The rules of business make the secretary the principal accounting officer (PAO) of the PSE. This status allows the PAO to raid the PSE for vehicles and real estate.

For some reason, despite agriculture being a provincial subject now, the federal government for its own political needs wishes to intervene in agricultural markets. It subsidises fertiliser and chooses to set the procurement price with a commitment to buy wheat. While the fiscal cost of these commodity operations is only about 0.5% of GDP, they do involve large and expensive government guarantees (almost 2% of GDP worth of bank credit is used). In addition, they distort the agricultural market. Cleaning out this operation i.e. rescinding government involvement is expected to increase GDP growth by about 0.5% annually.
The net result

Summing up these figures we can see that our fiscal deficit of about 7-8% comes from PSE losses, PSDP and commodity operations.

Careful and well articulated reform in these areas could not only make the budget manageable but have the additional payoff of increasing annual economic growth by about 5 to 6%. The quick fix of arbitrary taxes and chasing false revenue numbers is a bad strategy that is exacerbating the ailment of poor governance and low growth not fixing it......
Riaz Haq said…
Here's Finance Minister Ishaq Dar claiming 5% GDP growth in first quarter of FY 2013-14, according to Pakistan Today:

The financially beleaguered Pakistan Muslim League-Nawaz (PML-N) has claimed that the country has recorded at least five per cent growth in Gross Domestic Product (GDP) during the first quarter of this financial year and 17 per cent jump in revenue collection during July to November showing the “positive outcomes of the economic policies of the government”. During a press conference on Wednesday, Finance Minister Ishaq Dar said that the present government had successfully made a revenue collection of Rs 792 billion during the past five months against Rs 679 billion recorded in the same period last year – an increase of at least 17 percent. Besides, the fiscal deficit, which was recorded at Rs 690 billion during the period under the previous government, has been reduced to Rs 570 billion with the reduction of 2.2 percent. Remittances have also shown a growth of 7 percent during past five months making the figure to $6.4 billion against previously recorded $ 5.9 billion during the same period. Talking about foreign reserves which have depleted to over $3 billion, enough for only one month’s imports, the minister said that it was not a cause of concern for the government as it was expecting it. “The government has already stepped up efforts to jack up the reserves position to a reasonable level. We have policies and roadmap to bring the foreign exchange reserves to at least $20 billion in the next three years,” he said. Explaining how the depleted reserves figure would be pushed to the claimed level, Dar said that his government will receive $800 million from Etisalat by the end of the current month, with another $790 million from the Coalition Support Fund from US by January 15, 2014. Besides, at least $1.5 to 2 billion would be received against the auction of spectrum licence which is expected to be held in February 2014. Further, the government has received $137 million from the Islamic Development Bank. He said that inflation in the country was mainly because of the few bold steps taken by this government to resolve longstanding issues like circular debt. Through this move the government has saved at least Rs 70 billion in terms of interest. He criticised the caretaker government that despite changes made in 18th amendment of constitution, it had not cleared the accounts for the new government. Dar said that the devaluation of rupee was mainly because of speculation and government has taken steps to discourage speculators which was evident from the fact that the inter-bank rate on Wednesday was closed at Rs107 to a dollar. He hoped that the figure would further come down. According to him, the situation of inflows will further improve and those who speculate on Pakistani currency would end up as losers. The government, encouraged by positive outlook projected by “Standard and Poor” ‘Moodys’, planned to float a global rupee bond with the assistance of IFC who are also interested in floating of sovereign bonds of Pakistan which has received a very positive response from the market.
Riaz Haq said…
Here's an ET story on GSP+ status for Pakistan's textile exports to EU:

KARACHI: Textile tycoons, government officials and financial analysts all converge on one point that the grant of European Union’s GSP Plus status to Pakistan is going to spark investment, create jobs and give a big boost to Pakistan’s economy in coming years.
A long wait has come to an end as Pakistan has qualified for the generalised scheme of preferences, better known as GSP Plus, of the 28-nation European bloc.
The EU parliament on Thursday approved the preferential status for all the countries that had applied for special concessions on duties.
One of the biggest beneficiaries of the greater market access and duty concessions would be the textile industry of Pakistan that exported over $13 billion of products in the last fiscal year, constituting more than half of total exports worth $24.6 billion.

“This is the biggest news for Pakistan’s economy in recent years,” Gul Ahmed Textile Mills Executive Director Ziad Bashir said, referring to the inclusion of Pakistan in the list of countries that won the GSP Plus status.
Bashir, like other businessmen associated with the textile industry, has praised the government for effective lobbying and successful diplomacy.
GSP Plus, which will come into effect from January 2014, would attract new investment in the textile sector, leading to hiring of more workers in coming years.
“I think the GSP Plus will at least give a 10-15% boost to textile exports because of new investments in machinery, efficient energy systems, etc,” said Bashir.
This positive news has not come as a big surprise. The government and private sector have been eagerly waiting for voting in the EU parliament, especially after Pakistan got majority vote in the EU’s International Trade Committee in the first week of November.
Under the scheme, textile exporters can sell most of their products to EU states at concessionary rates of duty or without any duty, making the goods cheaper for European importers. Duty concessions will be for four years up to 2017.
According to industry officials and initial details coming from Europe, the tariff lines covered under the GSP Plus are around 6,000, accounting for 91% of total tariff lines. It is expected that Pakistan will benefit from almost 2,500 tariff lines, of which around 900 are related to the textile sector, brokerage house Topline Securities said in a report.
“We believe textile exports can be increased by at least $500 million to $1 billion in the next 15 months,” All Pakistan Textile Mills Association (Aptma) Central Chairman Yasin Siddik told The Express Tribune. Aptma is looking to create 300,000 to 400,000 new jobs in the next one year.
Riaz Haq said…
Here's an Express Tribune report on youth business loans in Pakistan:

With his new financing scheme for the youth, Prime Minister Nawaz Sharif on Saturday unveiled a plan to enable budding entrepreneurs to run their business ventures.
The Youth Business Loans initiative is the government’s delivery of a promise made during the election campaign. “During the election campaign, I witnessed the vigour and enthusiasm that the youth showed, and promised that if voted to power, the PML-N would empower the youth of Pakistan so they can contribute effectively towards the development of the country,” he said at the launch of the scheme.
The chairperson of the prime minister’s Youth Business Loans scheme, Maryam Nawaz, said the aim was to convert young ‘dependents’ into ‘providers’.
The scheme is designed to provide subsidised financing at eight percent mark-up per annum for 100,000 beneficiaries through National Bank of Pakistan and First Women Bank.
The total mark up rate would be 15 per cent but the government would pay the remaining seven percent on behalf of the applicants.
Those falling in the age group of 21 and 45 years are eligible to apply for loans from Rs100,000 to Rs2,000,000.
Small business loans with a tenure of up to seven years plus one-year grace period and a debt-equity ratio of 90:10 will be disbursed across the country including Gilgit-Baltistan‚ Azad Jammu and Kashmir and the Federally Administered Tribal Areas.
Youth will have an eight-year payback period with the first year as a grace period for repayment.
Riaz Haq said…
Here's Daily Times on ADB's $3.2 billion loan to Pakistan in next 2 years:

The Asian Development Bank (ADB) on Tuesday announced restoration of Budgetary Support for Pakistan from March 2014 along with Three Years Business Plan for the country under which it would disburse $3.2 billion from 2014-16.
ADB’s Country Director to Pakistan Dr Warner E Liepach made this announcement while addressing a press conference on Tuesday. The Bank announced its three years Business Plan for Pakistan under which it would disburse $3.2 billion from 2014-16. Of which about one-third will be for budget support while two-thirds for project lending. ADB has disbursed about $470 million in the current calendar year. Liepach further said that the Bank would disburse $2 billion to Pakistan during the current fiscal year.
He said that economy is on track and the financial support for Pakistan has been scaled up. He said ADB supports the government reforms and vision 2025 and disbursement would be in recognition of its economic reforms. He said that currently about 25 projects for the country are in pipeline, which included those related to infrastructure, irrigation and energy. More than 20 projects are being funded by the Bank.
Replying to a question, Liepach said that Diamer Bhasha Dam is still under consideration, however the Bank could not provide more than $1.5 billion for the project, which are linked with financial support and reforms. He further said that study report of the project would be completed in the next eight months. The ABD official said that there are operational and technical, governance and financial issues, including circular debt. The root cause of the circular debt needs to address while the cost should be brought down, he said, adding that the government has introduced some reforms; however these have been challenged in the Supreme Court.
Regarding subsides by the government; the ADB country director said that they should be targeted. “The economy is kept up in the first quarter due to good power supply. There has been agreement with IMF for the privatisation of some units and the agreement should be honoured,” he stated. Liepach said that privatisation should be done with a formal planning. ADB, he said, has approved a loan of $167.2 million for eight distribution companies in Pakistan to improve the power distribution system and to help provide reliable, regular electricity to businesses and domestic consumers.
The Bank has also approved $900 million loan for a new supercritical coal power generation unit in Pakistan that will deliver reliable, cost-effective electricity to hundreds of thousands of energy-starved households and businesses. The ADB has approved a $430 million equivalent loan to expand and strengthen national social safety net programme Benazir Income Support Programme (BISP), which is helping lift millions of families out of poverty, said Liepach.
Riaz Haq said…
Here's Bloomberg News on IMF asking Pakistan to actively increase foreign currency reserves:

Pakistan’s central bank must “actively” work to increase foreign exchange reserves, including adjusting interest rates, the top International Monetary Fund official to the country said.
“Pakistan needs to tap inflows including remittances, export revenue and capital transfers,” Pakistan mission head Jeffrey Franks said in a phone interview from Washington yesterday. Financial support from other international organizations likely to arrive in the next six to nine months will be “a positive,” he said.
The IMF approved a $6.6 billion loan in September to help Prime Minister Nawaz Sharif’s government stabilize the economy, which has suffered from a Taliban insurgency and power shortages. While Pakistan’s performance in the first review was mostly satisfactory, the IMF said foreign exchange reserves fell to a “critically low” level.
Sharif has changed energy policies to tackle power shortages and plans to raise as much as $1 billion in a bond issue abroad to raise funds. Currency reserves held by the State Bank of Pakistan have fallen about 60 percent to $3.7 billion on Jan. 2 from a year earlier, central bank data show.
The central bank has raised the benchmark interest rate by 100 basis points since the loan’s approval to 10 percent. The IMF faulted authorities for failing to prioritize rebuilding reserves in the review released on Jan. 3 and said they will remain tight for the next two or three quarters.
“The SBP must unhesitatingly use every policy tool at its disposal to boost reserves, including adjusting the policy rate, intervening to purchase reserves on the spot market, and allowing greater flexibility of the exchange rate,” it said.
Pakistan’s rupee fell 7.7 percent against the dollar last year, among the worst performers in Asia, according to data compiled by Bloomberg.
An earlier, partially disbursed $11.3 billion IMF program expired in September 2011 after Pakistan failed to meet the conditions attached to it.
Riaz Haq said…
Here's WSJ on State Bank Governor Yaseen Anawar resignation:

The head of Pakistan's central bank, Yaseen Anwar, resigned Thursday, the government said, on the eve of a review of the country's performance by the International Monetary Fund.

"He has resigned for personal reasons," said Shafqat Jalil, a Finance Ministry spokesman. He didn't give any further explanation, and Mr. Anwar didn't return calls seeking comment.

Mr. Jalil said an acting governor would be appointed Friday.

Mr. Anwar had been governor of the State Bank of Pakistan since October 2011. His resignation comes as the economy faces soaring inflation and a sharply weaker currency.

Foreign-exchange reserves are critically low. The country missed its target for foreign-currency reserves at the previous IMF quarterly review and was given a waiver on the issue.

The IMF agreed to a $6.7 billion bailout in September, but has released only roughly $1.1 billion of the three-year loan.

Officials from the central bank are to meet IMF representatives starting Saturday in Dubai, to begin the second quarterly review, a process that would involve the head of the central bank in the coming days.

The IMF's quarterly reviews are designed to ensure the country meets its bailout conditions.If the IMF finds Pakistan is failing to meet its bailout targets, future tranches could be in jeopardy, which would put the economy further at risk.

"The timing of this resignation is unprecedented, just before the second review," said a retired senior official. "It affects the credibility of the whole process."

A focus of the review will be Pakistan's net foreign-exchange reserves. The volatility of the rupee has been a source of tension between the central bank and the government, analysts said.

Mr. Anwar was widely criticized for his handling of the foreign-currency markets, an issue on which Finance Minister Ishaq Dar has personally intervened.

Mr. Anwar, a former investment banker, was appointed by the previous government, of the Pakistan Peoples Party.

The current administration, led by Prime Minister Nawaz Sharif took office in June.

In recent years, heads of the State Bank have come under pressure to increase lending to successive governments, to finance their budgets, an issue that may have contributed to the departure of previous recent central bankers.

"The Ministry of Finance does whatever it likes and the State Bank is expected to accommodate," said Zubair Khan, a former finance minister. Mr. Khan said Pakistan urgently required the IMF to increase the rate of disbursal of its loan.

, saying the current program was based on "unjustified optimism."

Pakistan is struggling with economic and security challenges. While Mr. Sharif's administration is considered business-friendly, analysts say its economic plans require an improvement in the security situation.
Farrukh Khan, head of research of KASB, a brokerage based in Karachi, said that inflation was now steadying, while other indicators were also more positive.

"The ship is turning around. It will take some time," said Mr. Khan. "There are definite signs of improvement."

The IMF, after its first quarterly review, found Pakistan's performance "mostly satisfactory." It is forecasting GDP growth of 2.8% for the current financial year. However, the IMF had also found that "the balance of payments outlook has worsened and firm action is required to address critically low foreign-exchange reserves."
Riaz Haq said…
#Pakistan’s forex reserves highest ever at US$20 billion: Ishaq Dar | BUSINESS -

Of the country’s total liquid reserves of $20.07 billion, $15.24 billion are held by the State Bank of Pakistan (SBP) while $4.83 billion are with the commercial banks.

He said receipts under various heads have materialized, pushing the level of foreign exchange reserves to over $20 billion. These receipts include proceeds from Euro Bond, tranche from International Monetary Fund (IMF), Coalition Support Fund (CSF).

Ishaq Dar said in February last year Pakistan’s foreign exchange reserves stood at $2.75 billion and at that time no one would have imagined that in a matter of such a small period of time these reserves would touch the present level.

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