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SBP Rate Projection & Rupee’s Next Move

October 28, 2015

Let’s not be fooled by the Doctors order demanding for a 20 pct depreciation of Pakistani Rupee. According to some of the recent reports in his latest discussion, he says that since India and China have depreciated/devalued their currencies, we should follow the same path.

Why does the Doctor have to plead for weakening of Rupee all the time in such a dramatically nonsensical manner without giving adequate evidance? When making such statements, demanding for sizable depreciation of Rupee, why he always avoids providing data evidence of economic gains to support his argument? The question that needs to be answered is that after Pak Rupee depreciation, how much will GDP grow? How much will Exports grow in volume and in size? Will this growth be one time after such a large size depreciation of Rupee or SBP will have to constantly keep Rupee weak to meet exports demand? How many new jobs will be created? And what would be the size of increase of tax collection? And will such a huge depreciation be enough to pay back mounting debt?

I am sure he must have done the mathematical calculation, as he keeps on honking weaker Rupee all the time. Because 20 pct depreciation of PKR would mean based on USD 65 Billion foreign debt, in Rupee term it would increase external debt by Rs 1.3715 Trillion.

Furthermore, in his argument he has emphasized that since India and China have depreciated their currency, therefore, Pakistan should do the same. Here is the data that will prove his assessment wrong and uninformed.

On January 1 2015, Indian Rupee was 63.165 and is currently trading at 65.03 per USD, which means it has weakened by 3 pct. Chinese Yuan on January 01 2015 was 6.2062 per One USD and its current parity against USD is 6.3558, so it has weakened by 2.4 pct.

Similarly, Pak Rupee on January 01 was at 100.48 per One USD against current inter-bank rate of 105.50, which means during same period Pak Rupee lost 5 pct of its value almost twice in comparison to China and India.

Whereas, in Pakistan Exporters are enjoying numerous types of concessions. SBP Benchmark rate is slashed to almost half, they enjoy refinancing facilities and Rupee too is substantially depreciated, which is one of the major causes of inflation.

Exports are required to deliver by improving the quality of its product to meet international standard and have to deliver by all means, as they enjoy extraordinary facilities in various shape of subsidies.

Recently, Pakistan’s financial market is witnessing war or words on economic performance between government officials and its supports versus former Finance Minister, joined by former MOF official.

The truth is that false sense of economic growth and increase in wealth is only meant for the chosen lot of our society, which is not benefiting over 90 percent of the population.

It is because present growth is not due to increase in productivity. The country is only surviving on borrowed money from external sources and has to continue to its borrowing strategy weather in short term or in long term. Income generation is at miserably low level, which does not meet/support government expenses.

Hence, the current economic growth is insufficient and extremely risky to match the pace of rising population, housing needs, public sector debt, income disparity, poverty and employment. More importantly, the unemployment statistic is misleading because it is a distorted fact of false calculation that mostly include part-timers and under age labor force.

Bank Advance/Deposit Ratio, which is just a whisker above 50 pct, is at pathetic low levels that clearly defy all argument about economic growth and surpassing of Rs 20 Trillion of the total Pakistan debt (External & Domestic) is the evidence that negates all the good talking about economic recovery.

More prove of economic distortion can be found from history of SBP injection (Reverse Repo) since August 2008, as Liquidity Crunch started to increase in size to support indirect government borrowing through government securities.

Since September 2011, to support government borrowing, injection size has become so large that without SBP (OMO) Open Market Operations ( Current – Rs 1.28 Trillion) market will face severe liquidity crunch, unless banks offload their government paper holdings.

While, corporate sector performance is largely at the cost of consumer due to overpricing as price of Oil, Coal, Cement, Steel, Iron Ore and Automobile. Prices of Gold, Rice, Sugar, Wheat etc has already fallen substantially in the international market. But not even minor price advantage is passed on to the end user/consumer and instead products have become more expensive. Hefty profit is earned and shared amongst the mighty shareholders.

Rupee’s Next Move

Meanwhile, I would stick to my January 02 Outlook 2015 target. In my yearly projection I said, in current calendar year Rupee would depreciate by 4-7 pct. Then Rupee against USD was trading @ 100.48.

My view on Rupee for 2015 remains unchanged, as further weakening of Rupee would bring no respite to the economy. Exports would continue to haunt economy due to lack of product range and innovation.

SBP Rate Projection

In 2015, SBP rate cut is in line of my forecast, as Central Bank has done its job. But coupon rate is still too high and very attractive for banks to consider increase in corporate sector lending, which does not look a possibility. Revenue shortfall is a huge factor that will see increase and continuation of sale of government paper and banks will be encouraged to invest in PIB/T-Bills/Sukuk.

SBP seems to be on the right track, but lack of Fiscal coordination in line with changes in monetary policy is hindering commercial bank lending to expand. It seems coupon rate is intentionally kept high to encourage banks to invest in government paper that helps to avoid government borrowing from SBP.

This strategy helps to stay within the agreed IMF limit, but it is at the expense of breaching of 60 pct debt limit, which is a domestic issue. Hence, economy will experience further burden resulting surge in deficit financing unless new source of revenue is tapped.

In today’s T/bills auction 1-years cut off yield dropped to 6.3325 pct from Pre-cut off 6.48 pct. But this drop in yield is adjustment of curve and has no link to SBP policy stance because it’s a government paper.

In next month’s monetary policy announcement, I do not see change in SBP policy stance, as Central Bank may prefer to wait until year end to assess the economic condition. By then, impact of earthquake will also be known and in next 2-months weather may play crucial part to determine crop condition. There is also minor risk of higher CPI, which is due next month.

However, in next couple of months unless there is severe winter in Europe and USA, supply pressure could further dent oil prices due to glut. Hence, it may remain weak and inflationary condition in Pakistan may further ease. Therefore, there is a better chance of another half-percentage SBP rate cut in the later part of year end.

Click to Read

Pakistan’s Economy & Global

Outlook 2015

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions)

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