Pakistan: Rupee Strengthens Against $USD After Receiving $750m Saudi Funds Agaisnt Asad Government

shiapost.com

The rupee continued to appreciate on Tuesday as the value of the US dollar fell to below from PKR 108 to PKR 100 after receiving $750 million funds from Kingdom of Saudi Arabia over military support against Bashar-al-Asad government in Syria.

According to the forex.pk website, the open market rates for the greenback were Rs99.90 in buying and Rs100.45 in selling. However, the inter-bank rates dropped further to Rs99.50 in buying and Rs99.70 in selling. The ongoing trend in the open market suggests that the value of the rupee has fallen by 0.99 per cent from Monday, and dropped by 5.64 per cent since January.

The current trend in the inter-bank trading showed a drop of 2.64 per cent from yesterday, and a 5.23 per cent fall from last month.

The yearly difference in both the open market and the inter-bank trends is a rise of 1.01 per cent and 1.73 per cent respectively. Pakistan’s senior politician of Sheikh Rashid observed that the government instead of taking care of its own people hardly hit by terrorism has preferred to interfere in Syria which he added was a violation of international norms when it comes to international relations. He termed himself misfit for the parliament under the circumstances and announced boycott of the session. It is to mention here that according to foreign media, Saudi Arabia has received Pakistani arms including anti-aircraft and anti-tank rockets to Syrian rebels to try to tip the balance in the war to overthrow President Bashar Al Assad.

As the State Bank of Pakistan remains tightlipped over the source and purpose of funding, Pakistan received another tranche of $750 million in the newly-established Pakistan Development Fund (PDF), taking the total contribution to $1.5 billion so far. Highly-placed sources told The Express Tribune that friendly countries have injected another sum of $750 million in the PDF – an account opened to channel money from abroad. The last tranche was received in February that stabilised the dwindling official foreign currency reserves.

On February 13, 2014, Foreign Office spokesperson Tasnim Aslam told a weekly news briefing that defence cooperation would figure in the Crown Prince’s interactions and that Pakistan was eyeing Saudi Arabia as a market for military gear. “Certainly, defence cooperation would figure in the talks. The army chief would be calling him separately,” she said.

Pakistan is interested in selling arms to Saudi Arabia, including the JF-17 Thunder jet co-developed with China, the Mushak trainer aircraft and other equipment, she added. Aslam rejected recent Western media reports suggesting that Pakistan and Saudi Arabia are looking at nuclear cooperation, describing them as “baseless”. “There is a whispering campaign and at times there are reports based on leaks or background briefings…They are baseless. Pakistan and Saudi Arabia are not discussing nuclear cooperation,” she said It is the first time that any country has generously given $1.5-billion assistance to Pakistan within one month, as Islamabad never received such an amount as ‘upfront’ payments. The US, which remains the largest contributor, always gave amounts in tranches spreading over several years. Under its five-year, $7.5-billion Kerry Lugar aid package, Washington gave less than $2.5 billion in government-to-government assistance in over three years.

However, it was not clear whether the money received is a grant or depository loans aimed at temporarily bailing out the country. The Pakistani rupee’s strong showing against the US dollar over recent days has taken financial analysts and currency traders by surprise.

The rupee gained 1.66 on the dollar in one day on Monday and has gone down from over Rs 111 to just above Rs 100 against the greenback.

Increases in remittances, the clearance of Pakistan’s share in Coalition Support Funds (CSF) of almost $ 350 million, and a massive payment of more than $ 750 million into Ishaq Dar’s brainchild, the Pakistan Development Fund, have played their part.

In particular, growth in exports, almost 18 percent year-on-year, has pushed the trade imbalance down almost five percent, strengthening the rupee. However, globally, the dollar has been weakening for the better part of seven months, as part of a deliberate monetary policy by the US Federal Reserve to help exports. One can’t overplay the effects of funds entering Pakistan from various sources, which have boosted the State Bank of Pakistan’s (SBP) forex reserves by over $ one billion in the last month.

The SBP was tightlipped about the source for much of these funds, but it is possible they recalibrated forex levels after a deferred payment scheme was reportedly reached with Saudi Arabia for oil purchases. The prime reason for rupee to revert back sharply in the last week is the building up of SBP reserves which are up from the low of $2.84 billion to $3.92 billion in a span of three weeks. Some of the flows like CSF money were well anticipated but the market was surprised by around $700 million jump in reserves in the third week of February. That is probably due to $750 million in aid coming from Saudi Arabia for some military related supports to the Kingdom.

That has changed the sentiments–punters, traders and treasurers are expecting reserves to build up further on account of some negotiations going on with KSA and some GCC countries for deferred oil payments. The government has almost finalized a deal with KSA for six months deferred oil payments for a period of three years, similar deals are envisaged with Kuwait and the UAE. Together, these measures can give a cushion of over $5 billion in imports payment in next six months and that can be continued for three years. Even, only with Saudis we can save $400-500 million per month in oil import payments for six months and forex reserves to be up by same amount. No wonders, the SBP expects its reserves to reach by $4.7 billion by April end and $6.7 billion by June end (See BR Research article Whats behind rupee appreciation?” published on Feb 18). This information has changed the market sentiments, thereby creating a domino effect as many who were holding back dollars for months are now offloading them to book the loss, and that has resulted in further appreciation in the currency. Plus, the USD is falling internationally for a host of reasons–the Indian rupee has appreciated by 3-4 percent last week against USD, so Pakistani market is no exception.

But this sudden appreciation in currency without strong macroeconomic fundamentals has all the potential to worsen current account balance and can make currency more volatile. Its a big loss to exporters–if the dollar is down by one rupee, our textile exports lose out Rs12billion per annum, so in the last week potential loss is close to Rs50billion. Soon the strong textile lobby and large vote bank in Faisalabad may approach PML-N leadership to bail them out. Plus, its going to be windfall for importers to enjoy higher margins by not fully passing on the impact of rupee appreciation. Even if they do pass on the benefit then higher import demand may put a pressure on balance-of-payment.

Pakistan Hosiery Manufacturers & Exporters Association (PHMEA) on Monday expressed concerns over the appreciation of Pak rupee against dollar, which has a serious impact on exporters. “The appreciation of rupee against dollar during your tenure is no doubt a very good sign; however, this has seriously impacted our exports,” says the PHMEA letter to Federal Finance Minister Ishaq Dar. In the letter, Chief Coordinator, PHMEA, Javed Bilwani said that the foreign buyers signed deals with Pakistani exporters three to four months ahead of the shipments. “Exporters, who have taken orders on the costing before the increase in value of rupee, will be seriously affected as by the time payment is realised there would be a difference of approximately seven percent as the exchange rate of dollar against rupee was Rs 108.46 on December 12, 2013 and Rs 100.90 on March 10, 2014,” he said.

He said that the exporters were striving hard to retain their share in the global market just at 4 to 5 percent of margin of net profit, adding that the strengthening rupee value will left them ‘ruined’. He said the rupee value grew during November and December last year which is always a peak booking period for the exporters to strike deals with foreign buyers for next summer season. He requested Ishaq Dar to spare time for a meeting with the value-added textile products exporters to evolve a policy that may support the struggling sector to earn foreign exchange for the nation without getting affected.