THE country’s foreign exchange reserves fell rapidly until the end of March, but they may start rising from this month, providing a breather to the beleaguered forex market.

The central bank’s forex reserves saw a decline of five per cent only in March. However, a rise is expected in the coming weeks.

“Arrangements are place to boost the reserves starting from this month,” a senior central banker says. “The end-June debt servicing should be quite smooth. We’ll be very much comfortable by that time. So, forex markets must feel confident (about the supply of foreign exchange), shun nervousness and keep functioning in a smooth and disciplined way.”

Senior bankers and forex dealers say they have received informal messages from the SBP about the prospects of huge foreign funding coming in

The question is: what has created this optimism among central bankers? The International Islamic Finance Corporation (IIFC) has agreed to offer Pakistan $3 billion to finance external trade and another $285bn for fuel purchases from the international market, according to a Reuters report.

Moreover, the government is also expecting to seek some immediate forex injection into Pakistan by the Chinese. By the time this write-up is published, Prime Minister Shahid Khaqan Abbasi would have undertaken a one-day visit to Beijing. “We are sure to hear something good following that visit,” says a senior official of the Ministry of Finance, but refuses to discuss the specifics.

Sources close to the ministry and the State Bank of Pakistan (SBP) say that as a result of top-level contacts between Islamabad and Beijing, a couple of financing arrangements are under discussion. China is expected to offer a substantial sum of foreign exchange right during this quarter.

Senior bankers and forex dealers say they have got informal messages from the SBP about the prospects of huge foreign funding coming in. “That’s why panic-driven dollar buying in the open market last week subsided after a (closed-door) meeting between forex dealers and senior central bankers,” says a treasurer of a large local bank

However, it has yet to be seen in what form China will help us rein in the external-sector issues. From offering a loan to placing funds with the SBP to reactivating financing line for Pakistan-China bilateral trade settlement in the yuan to engineering yuan-rupee swaps between Pakistani and Chinese banks, there are several options. Officials say exercising any one or a combination of these options can help Pakistan in keeping its forex reserves stable amid external-debt servicing during the April-June quarter.

“On top of the Chinese assistance in whatever form it might come, trade financing of the IIFC can really provide a breather to a beleaguered forex market, but much depends on when funds actually start flowing in,” says the chief forex dealer at another large local bank.

SBP’s forex reserves slumped to $11.602bn on March 30, from $12.227bn at the end of February, showing a big decline of $625m, or 5pc, within a month. At $11.602bn, the central bank’s reserves are not enough even to cover two and a half months of imports.

A forex cover of less than three months of imports is generally considered too low, and indicates that the economy’s external sector is in real trouble. And that exactly is the case: not only our current account deficit shot up to $10.286bn in July-February from $7.126bn in the year-ago period, the overall balance-of-payments deficit also swelled to $3.775bn from just $1.008bn.

“So, it was but natural for forex markets to show unease,” says a senior central banker, commenting on the last week’s run on dollars in the open market. In the inter-bank market, too, there was some uneasiness towards the end of March and in the first few days of April.

However, compared to the open market, the inter-bank market is more mature, more disciplined and under stricter control of the SBP. Besides, sitting on their own forex reserves of $6bn plus, banks feel more confident than forex companies.

Executives of forex companies claim these companies are showing a greater amount of understanding these days in relation to our external-account situation. They say it’s not just speculative, panic-driven dollar buying that you see in the open market on occasions. A few big exchange companies actually run short of dollars after selling in inter-bank market more than they should, they insist.

“They start turning down even genuine buyers of foreign exchange at their own counters, creating a panic-like situation in the open market. This, coupled with renewed fears of a further fall in the rupee’s value, was at the heart of a sudden spike in the dollar demand last week,” says an official of the Exchange Companies Association of Pakistan.

In the open market, the rupee lost 1pc value against the US dollar in the first week of April, though exchange rates in the interbank market remained stable. Most forex companies’ selling rate stood around Rs117.40 a dollar on April 6, up from Rs116.25 at end-March. In the interbank market, the local currency lost just 0.1pc worth during this period, falling close to 115.80 in midday trade on April 6 from 115.65 on the last working day of March.

Whereas optimism runs high in officialdom about our external-sector worries coming to an end soon, the forex market will be in an uneasy wait-and-see mode unless the facts about the current account and balance-of-payments deficits change. And they cannot change without some fatty, fresh forex inflows pretty soon.

Meanwhile, the SBP may keep firefighting on the forex front, sometimes using moral suasion, and at other times resorting to other more direct techniques like dollar buying from banks or from forex companies via banks.

However, it’s not just fundamental weaknesses of the external sector alone that are adding fuel to the fire. Political manoeuvring ahead of promised elections, uncertainty about whether elections could be held on time and nervousness of the current government that is about to finish its term are all contributing to it, senior bankers and executives of exchange companies say.

Published in Dawn, The Business and Finance Weekly, April 9th, 2018