KARACHI, Sept 10: The gains Pakistan economy made after 9/11— both directly and in the shape of improved policies and better economic management —have showed a certain level of consistency in the last two years. But as the third year of the 9/11 calender sets in, hopes and fears clash. What can be said safely is that the gains of 9/11—like other economic developments—are bound to move with market forces. And in fact—market forces have already been in play in materializing these gains and marginalizing them at times.
Pakistan’s liquid foreign exchange reserves that stood at $3.3 billion immediately before fateful September 11, 2001 have more than tripled to $11.1 billion after two years.
The forex reserves rose shot up primarily due to increased home remittances or money sent back home by overseas Pakistanis. Monthly home remittances that averaged at less than $100 million before September 11, 2001 now stand around $350 million. Overseas Pakistanis have been sending more money back home through banks as the US and the UAE and other countries tightened anti-money laundering rules after 9/11 to starve the terrorist financially.
Larger inflow of home remittances in the past two years has not only helped Pakistan build up its foreign exchange reserves but has also improved its balance of payments: In fiscal July/ June 2001/02 Pakistan posted a current account surplus of $2.8 billion that increased further to $5.2 billion in 2002/03. This has helped Pakistan economy in several ways creating more room for the economic managers to implement a mix of home-grown and IMF-World Bank recommended set of reforms in key sectors of the country’s economy.
The rupee has also gained substantially in the wake of 9/11 enabling expatriate Pakistanis to send more money back home through official channels. On September 11, 2001 the dollar was selling at Rs64 in the inter-bank market and at Rs67.10 in the open market. Two years after the greenback is now trading at Rs57.77 in the inter-bank market and at Rs58.15 in the open market. This means the official and open market value of the rupee has risen by 9.7 per cent and 13.3 per cent respectively against the dollar in the last two years. This has stopped the dollarization of the economy and also reversed capital flight.
But a million dollar question is how sustainable are the positive trends that have set in after 9/11?
FOREX RESERVES: The pace of forex reserve building was a bit higher in the first year after 9/11 than in the second year: The reserves had recorded an increase of $4.3 billion in the first year — rising from $3.3 billion in September 2001 to $7.6 billion in September 2002. In the second year the reserves saw a lower growth of $3.5bn — from $7.6bn in September 2002 to $11.1bn as of now. Central bankers say this does not mean that the pace of inflow of foreign exchange has slowed. “It only shows that the reserves base has expanded to a level that the restrictions on outward flow of foreign currency have been eased off,” said a senior central banker. He was referring to various measures taken by the State Bank in the last one year allowing liberal outward transfer of money by corporates and individuals.
“Besides, the time has come to focus more on how to employ the reserves more gainfully,” he said implying that the need to build up reserves is not as urgent now as it has been one year before.
HOME REMITTANCES: Home remittances had shot up from $1bn in 2000/01 to $2.4bn in 2001/02 showing the impact of 9/11. The trend did continue and in 2002/03 home remittances reached a record high of $4.2bn. Opinion is divided on whether the rising trend would continue further. Those who think the trend should not falter argue that most Pakistanis living in the US find it difficult to keep money there fearing freezing of funds in the ongoing hunt against financiers of “Muslim extremists.” They believe this is enough to keep the present pace of home remittances from the US and other countries under its influence.
But those who think that home remittances inflow would fall in the days to come say super-rich Pakistani expatriates have overcome their anxiety in the wake of hunt against financiers of so-called Muslims extremists. They say such expatriates whether in the US or in other countries under its influence will no more be making unnecessarily large inflows of home remittances out of panic. Those fearing a fall in home remittances also argue that the hundi premium that gradually vanished after 9/11 has once again raised its ugly head. The spread between the official and open market exchange rate currently ranges between 35-40 paisa per dollar in spot value and more than a rupee in telegraphic transfers. “If this spread is not immediately brought down part of home remittances business would go back to hundiwalas thus lowering the official inflows,” says head of a foreign exchange company.
What lends credence to this statement is the fact that home remittances from the US and the UAE dropped 22pc and 17.6pc respectively in July 2003. Remittances from the two key centres fell to $79.5m and $48m respectively in July 2003 from $102.4m and $58.3m. Officials of banks handling home remittances say they have also witnessed a falling trend in August. Figures for August will be out next week.
EXCHANGE RATES: In the first year after 9/11 the rupee gained 7.4pc against the US dollar in the inter-bank market— —rising from 64 a dollar on September 11, 2001 to 59.26 a dollar on September 11, 2002. In the second year the gain has been a bit lower: the rupee has risen from 59.26 a dollar to 57.77 showing 2.5 appreciation in last one year. In the open market also the rupee showed a dramatic increase of 11.8pc against the dollar in the first year after 9/11 — rising from 67.10 per dollar on Sept 11, 2001 to 59.18 per dollar on Sept 11, 2002. In the second year the rupee made a much lesser gain of only 1.7pc as it rose from 59.18 a US dollar to 58.15.
Bankers attribute lower increase in the rupee value between September 2002-September 2003 to the State Bank policy of defending the dollar to benefit the exporters. They say had the SBP not defended the dollar during this period the fall of the dollar would not have been lower than what it was between Sept 2001-02. Senior bankers say the SBP still continues to defend the dollar for exporters but not too aggressively because it has already liberalized foreign exchange regime that has led to a higher demand for the dollar reducing the need for the SBP to mop up its excess inflows in the inter-bank market. Besides the government has already announced to pay before time at least $1bn external debt during this fiscal year. Bankers say that would also add to the demand for dollars again minimizing the need for supporting the greenback for benefiting exporters.
FOREIGN INVESTMENT: Both foreign direct investment as well as portfolio investment also showed rising trend in the last two fiscal years. Foreign direct investment rose from $322m in 2000/01 to $485m in 2001/02 and $798m in 2002/03.
Analysts generally believe that Pakistan’s decision to play a key role in the US-led war against terrorism in this region in the wake of 9/11 helped it secure higher foreign investment. They say the war against terrorism that ended the Taliban’s rule over Afghanistan and installed a caretaker government there — and Pakistan’s own pro-investment policies opened up new avenues for direct investment in the country. Part of the foreign direct investment also originated from Pakistanis living abroad chiefly due to the fact that they found their own country safer to invest in rather than keeping huge funds abroad after the eventful 9/11.
The same holds true partially for portfolio investment here. Portfolio investment or investment through stock market was minus $140m in fiscal year 2000/01. But in the very next year the situation improved and the figure looked much better — just minus $10m. In 2002-03 the country saw a net inflow of $22m in portfolio investment. Analysts and stock brokers link this sea change in portfolio investment scenario both to reversal of capital flight as well as renewed interests of foreigners in Pakistan market.
But here again opinion is divided on whether the trend would continue through the coming months and years. Already in July this year foreign direct investment has fallen to $32m from $42.4m in July 2002 — and portfolio investment has remained at minus $0.5m — where it was in July 2002. Stock brokers say the interest of both foreigners as well as overseas Pakistanis would remain intact in Pakistan stock market because of its best performance. Karachi Stock Exchange 100-share index that stood at 1256 in September 2001 has more than tripled to 4580 in two years. Market capitalization has performed at the same pace — rising from Rs316bn on September 11 2001 to Rs1016bn on September 10 2003.
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