KARACHI – The Pakistani Rupee (PKR) has achieved some gains, as it’s exchange rate has appreciated one percent against the US dollar since January 2011, taking PKR to a 10-month high. This was triggered by a firm current account balance and sound foreign exchange reserves.
Any major fluctuations in the PKR and US dollar parity in the short term is not expected; while the Pakistani currency may weaken in the medium term, said Saad Khan at AHL.
Compared to internal dynamics, Pakistan’s external economy, in terms of exports and remittance inflows, paints a much more promising picture. Despite a standing trade deficit of $11.2 billion (1.65 percent annual rise), higher international commodity prices have helped resurgence in Pakistani exports, posting an annual 26.5 percent ($18 billion) growth for the period July-March 2011, while it outpaced overall imports. However, higher oil, food prices and a lower than expected production of Rabi season crop (25MT wheat production target) may jeopardise trade figures, thereby, pushing trade deficit further.
Thus, we expect the overall trade deficit for FY11 to close at $13.77 billion (21 percent annually), he added. In addition to strong exports, higher workers’ remittances which have so far posted 22 percent growth ($8.0 billion) in July-March, 2011, continue its northward trajectory. This has played an essential role in filling the void left by the lackluster Foreign Direct Investment (FDI), which have, so far, suffered 22 percent annual contraction in FY11. However, in future, the ongoing Middle East and North African (MENA) crisis may be impediment for remittances since total payments received for MENA countries almost accounts to 45 percent of the total remittances received.
High foreign exchange reserves have propped up potential to stabilise the rupee-dollar parity, which for the FY11, has depreciated by a mere two percent against 7.7 percent in FY10. So far, total foreign exchange reserves held by State Bank of Pakistan (SBP) accumulate to $14 billion. Meanwhile, foreign exchange held by scheduled banks stands at $3.4 billion with a potential to provide approximately six months imports cover.
We may observe swift deterioration of foreign exchange reserves if the import bill rises faster than projected on the back of higher commodity prices (mainly food and petroleum) and non-monetisation of the last two International Monetary Fund (IMF) tranches, he added.
Given the aforementioned reasons, key risks to sustainability of current account come from exports, especially that to Europe and Middle East, (accounting to almost 43 percent of exports) and any respite in remittances in the short term. In addition, strengthening of the US dollar against other major currencies may threaten Pakistan’s current account balance.
