The country’s 2011 economic story swung in tandem with the changing dynamics of international commodity prices and its subsequent impact on the external accounts, viewed the analysts.
The first half, ranging between January and June, was marked with optimism as favourable cotton prices with able support of work remittances reflected positively on the country’s dollar reserves, while the second half, July to December, was about adverse commodity prices shock (firm oil prices and declining cotton prices) coupled with subdued support from the financial account.
Resultantly, the country’s foreign exchange reserves rose to all-time high of $18.3 billion by mid-July while easing in the later half to around $16.8 billion (mid-Dec 2011). “Fiscal indiscipline and energy shortage also continued to mar country’s economic health,” said Nauman Khan of Topline Securities. These factors, the analyst said, were subsequently reflected in the central bank’s monetary policy stance that instigated the monetary easing process (slashing policy rate by 200bps in 2-stages), but have recently halted the process as weakness on the external account has emerged. Similarly, he said, the rupee remained stable against US dollar in the early part of 2011 while it came under considerable strain in the later part. Khan said with FY12 average inflation to fall below government expected target of 12 per cent with comfortable external account position during first half on account of favourable commodity prices and rising remittances, central bank initiated the process of monetary easing to give the much-needed impetus to economic growth.
Staggered in two stages, the SBP slashed the policy rate by 200bps during July-October 2011.
However, the regulator halted the process of monetary easing in the last Monetary Policy Decision as weakness in the external account emerged coupled with higher than expected fiscal deficit. In 5MFY12, the country’s current account deficit stood at $2.1 billion, already crossing the full year target set by government initially, while financial account has not provided much support. Subsequently, the country’s dollar reserves have fallen from all-time high of $ 18.3 billion in mid-July to $16.8 billion (mid-December 2011). On the fiscal side, the deficit is expected to stand above 6.5 per cent of Gross Domestic Product (GDP) as against the initially envisioned target of 4.0 per cent of GDP.
In 2011, the 6-months treasury bills declined by 146 basis points (bps) to close the year around the level of 11.9 per cent, but went down to trade around the levels of 11.6 per cent in late November. The yields on 10-year Pakistan Investment Bonds (PIBs) reduced by 114bps to stand at 12.99 per cent, during the period under review with low of 12.0 per cent registered during the month of November.
Similarly, Khan said, rupee remained stable during the initial half of the year on account of strong external account position. “However, emergence of weakness in the external account along with SBP restoring the forward cover facility and impact of IMF’s loan repayment of $1.2 billion on forex reserves exerted pressure on the PKR towards the later half of the year,” he viewed.
Overall, the analyst said, the local currency depreciated by 4.9 per cent against the greenback in 2011 with 4.5 per cent devaluation coming in 2H2011 alone.
