Pakistan needs a permanent source of dollar inflows

Pakistan’s import and debt repayments are continuously proving to drain the country’s foreign exchange reserves.

Syed Hassan Raza March 01, 2015
The state of affairs prevalent in Pakistan’s currency market can be considered analogous to that of a bathtub. Just turn the tap and water will start flowing into the tub. Assuming the plughole is properly covered, the tub would start accumulating water.

However, if the plug is removed, all the water flowing in from the tap would immediately flow out of the tub. The equilibrium point would arrive when the water flowing in from the tap is sufficient enough to compensate for the water going down the drain. And Pakistan’s currency market is just not able to maintain this equilibrium.

The Pakistan Muslim League-Nawaz-led (PML-N) government has adopted different means in order to increase the dollar inflow. However, all these various measures have been successful in producing one-time inflows; for example, the issuance of Eurobonds and the auction of telecom licenses.

Nonetheless, these one-time inflows have contributed to the strengthening of the Pak Rupee. On the other hand, Pakistan’s import requirements and debt repayments are continuously proving to be a drain on the country’s foreign exchange reserves. Sooner or later, the Pak Rupee shall once again come under tremendous pressure due to dwindling dollar inflows and due to the fact that the country’s outflows are going to remain relatively constant in the foreseeable future.

The recent strengthening of the dollar to a high of Rs102, or what can also be considered as a weakening of the rupee, is indicative of the future adverse trends if the present government fails to bring into existence a permanent source of dollar inflows.

Some analysts may consider this latest deterioration in the value of the rupee as an outflow of short term capital, or what is also commonly known as hot or speculative capital.

In an era of enhanced capital mobility, this risk of unfavourable hot capital flows shall always remain. Moreover, the government does not have the financial capability to intervene in the forex market and contain the fallout of adverse hot capital flows.

The forex reserves are not sufficient enough to match the massive amounts of funds at the disposal of foreign institutional investors. Hence, we may conclude that the government will have to abandon its symptom management policies of intervening in the forex market and of providing a transitory and artificial support to the rupee.

What Pakistan needs is a strategy which would allow the government to increase the dollar inflows on a permanent and sustainable basis. The Pakistani foreign exchange ‘tub’ is in extreme need of a tap which would ensure a reliable and a consistent inflow of dollars instead of sputtering to death time and again.

Unfortunately, Pakistan has historically relied upon such unpredictable dollar inflows instead of formulating a strategy which would create a permanent source of inflows. The Korean War, the Afghan Jihad and the War on Terror proved to be some of the prominent eras of Pakistan’s history which reduced the country’s balance of payment difficulties for a limited period of time. However, as soon as these one-time dollar inflows came to an end, the country’s forex market once again went into a tailspin.

As of now, the only source of dollar inflows which has consistently maintained its magnitude is work remittances. Hence, the government needs to enhance its export competitiveness in order to create another source of sustainable dollar inflows.

Without focusing on its export sector, the country will always remain dependent on loans from the international financial institutions apart from entangling itself in foreign misadventures in exchange for financial aid. It remains to be seen what purpose the amount of $1.5 billion flew into the Pakistan Development Fund served. It is being alleged that this amount was received from Saudi Arabia.

Regardless of who and for what purpose the amount was received by Pakistan, we can certainly agree upon one thing – as long as Pakistan will not restructure its forex ‘tub’, it will only end up being a pawn in the hands of other countries and will continue to serve the designs of its donors and lenders at its own expense.
WRITTEN BY:
Syed Hassan Raza A Research Associate at Senate who is assisting the Standing Committee on Finance, he is profoundly interested in exploring and researching Pakistan's economic and political issues.
The views expressed by the writer and the reader comments do not necassarily reflect the views and policies of the Express Tribune.

COMMENTS (12)

Forex Boom | 8 years ago | Reply This is very nice post, I really appreciates your efforts and talent.
whitesky | 9 years ago | Reply continuous inflow of foreign currency --- source can be increase in exports of goods and services for which one has to be competitive in terms of price, quality, on time delivery etc. To be competitive on price identify the strength of industry in input cost like material, wages , power and favourable/ suitable government policy . Second most important and sustainable source will be foreign investment . this requires peace, political stability, suitable policies and availability of infrastructures like rail , road, power availability of skilled personnel and ease of doing business in the country mainly for foreign companies. Such an environment will attract foreign direct investments continuously and improve the economy too. every body in the government is aware of it but finding it difficult to achieve it.
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