In the quarter ending December 31, the Central Bank of Pakistan reached milestone of increasing the external assets and decreasing the internal assets of banking system. In lending to the government of Pakistan, the Central Bank also complied with the process required under the Stand-by Agreement.

The government of Pakistan raised US$2 billion from the auction of Treasury Bills (T-Bills) in December and paid off the Central Bank’s loan.

It may be noted that instead of releasing the aid in January 2010, the IMF had send the fourth tranche of US$1.20 billion on December 28 and additional US$400 million were provided to cover the budget deficit.

The IMF aid helped the banking system to increase its foreign assets up to US$4 billion and the SBP has remained successful in achieving the prescribe targets.

“With reserves touching $ 15 billion the upside risks to the USD-PKR are materially lower at the moment we can easily rule out the possibility of a runaway weakness, I believe we can even see an upside” says Priyanka Chakarwarty, FX Strategists at Standard Chartered India.

Some of the main factors for the rupee finding the floor were the IMF program, slowdown in imports, S&P upgrade of the sovereign credit ratings, easing of inflationary pressures, return of portfolio investment to the equities market and record remittances.

THE IMF PROGRAM

“The $ 12 billion arrangement with the IMF has had multiple effects on the rupee situation. The most obvious impact has of course been on the dwindling forex reserves. But another far more important impact has been on the economy by containing the twin deficits through corrective measures” says Sayem Ali of Standard Chartered Pakistan.

In fact it was the IMF’s approval to provide an additional $ 3.2 billion which also triggered an S&P upgrade from CCC+ to B-. This upgrade has caused an improvement in the risk appetite, and the Karachi Stock exchange for the first time in 18 months, saw an inflow of over $ 100 million in the month of September alone. The release of the USD 1.2bn third tranche of the IMF loan, plus a USD 1.2bn increase in Pakistan’s Special Drawing Rights (SDRs), helped to boost FX reserves to USD 14.3bn as of end-August 2009, from USD 6.5bn in October 2008.

“Going forward, we expect the current account deficit to narrow further to USD 8.4bn (4.9% of GDP) in FY10 on weak import demand and robust growth in remittances.” believes Priyanka Chakarwarty.

The current account deficit also improved significantly to USD 8.9bn (5.5% of GDP) in FY09 from USD 13.9bn (8.5% of GDP) in FY08. While the trade deficit narrowed from USD 15bn to USD 12.5bn, net private remittances rose by 20% y/y to a record high of USD 7.8bn. Even though the portfolio outflows negatively impacted the financial account, but official inflows helped to narrow the balance-of-payments deficit.

OIL PAYMENTS:

The year also saw a significant shift in the central bank’s policy towards oil imports payments by moving all payments completely to the interbank market, thus putting the rupee under further pressure.

Starting early in January 2009 the central bank ordered banks to make all purchases of foreign exchange related to furnace oil from the interbank market meanwhile restricting its support to products exclusive of furnace oil.

In July we saw that support further restricted to just crude oil when the SBP ordered all banks to make all purchases of foreign exchange related to diesel and other refined products from the interbank markets as well.

Finally in December the state bank withdrew its support from the crude oil payments as well and ordered the banks to make the crude oil related payments from the interbank market.

THE LOOK AHEAD:

The Pakistani rupee (PKR) has stabilized, depreciating by around 6% in 2009 versus 22% in 2008. External account corrections, combined with record-high remittances from overseas Pakistanis, have helped to keep the PKR broadly stable.

However, the PKR can come under pressure during 2010 because of the rising trend in the commodity prices and exchange rate reforms including shifting crude oil payments to the interbank market.

On the brighter side there is a lot of potential in the already fruitful remittances area according to the Governor SBP Saleem Raza still over 50% of the country’s remittances come in through non formal channels. Some of the seasoned journalists do not completely agree with the governor’s statistics but they do agree that there is a lot of room for increase in workers’ remittances.

PAKISTAN’S FOREX MARKET

Pakistan forex market sees a trade of over $ 8 billion every month the bulk of which is carried out in the interbank market. There are a total of 31 exchange companies authorized by the central bank five of which are subsidiaries of country’s major banking institutions.

Three exchanges are currently on the suspension namely Al Sahara Exchange, Khanani and Kalia and Zarco Exchange due to non compliance and other issues. There are another 30 companies in the B category of exchange companies whose operations are restricted only to the sale and purchase of foreign currencies

All of these companies come under the exchange policy department of the State Bank of Pakistan and are regulated by the Foreign exchange regulations act 1947 (FERA 1947). There is a foreign exchange manual published by the central bank which out lines all the dos and don’ts for the authorized dealers, exchange companies, investors and general public.

Total addressable market for the sale of sovereign bond in Pakistan is estimated to be as high as Rs500 billion.  By launching new investment instrument Government hopes to attract the excess money from the market that is not finding any productive outlet.

Savings bond will be sold through the network of the Central Directorate of National Savings and will be traded in the capital market.

Because of the lack of investment opportunities, experts feel that the prospective share price per unit of the government bond will higher than its face value.

The administration of Karachi, Lahore and Islamabad stock exchanges and the Security Exchange Commission of Pakistan have already received the draft rules and have very short window for comments.

General Manager of the Karachi Stock Exchange Haroon Askari was quoted in Dawn saying these bonds can “change fundamentals of our marketplace”.

Government backed bond will be ‘deemed listed’, which means that it will avoid the arduous procedure of application for listing and public offer before making its way to the market.

Government officials say they are actively pursuing the move to meet Pakistan’s budgetary demands.

As recipient of IMF loan, Pakistan is prohibited from the State Bank borrowing beyond certain limits. The World Bank and the ADB have also pressured Pakistani government to introduce investment opportunities and raise resources from market at competitive rates.

If this bond is ‘deemed listed’ next week, it will qualify Pakistan for the last tranche of $200 million under the ADB Accelerated Economic Transformation Project (AETP). Pakistan has been assured that the amount would be disbursed as soon as the bond is introduced during the current month.