Remittances are relentless lovers of the rupee. They console, comfort and support it like nothing else. The rise of the rupee during March has cheered up the politically challenged PTI government. But since the rupee’s rise is primarily due to remittances, the party is presenting it as proof of the unwavering confidence of the majority of overseas Pakistanis in the leadership of Prime Minister Imran Khan.

But can the rupee keep marching on in April-June and even in the next fiscal year? And, can remittances keep growing at the current rate during this quarter and in the next fiscal year? Markets are busy making projections — in case of banks, smart projections — and are behaving accordingly.

One year ago, at the end of March 2020, the rupee had traded at 166.70 to a dollar in the interbank market. Banks were expecting it to fall to 168.83 to a dollar by June that year. So the three-month forward price of the dollar was Rs168.83.

Now at the end of March this year, the rupee closed at 152.76 to a dollar in the interbank market. And the three-month forward price of the dollar was quoted at Rs155.48. Things have really changed.

The forward dollar price that banks quote to customers reflects their anticipation about exchange rates. They charge a forward premium on forex deals to be settled three months, or six months or one year, from a given date.

The decline in the current account deficit is the biggest reason for the rupee’s gains. But this decline was entirely because of the rise in remittances

Importers book dollars in advance to clear their impending import bills. Keeping the exchange rate movement trend in mind, banks quote forward prices higher than the spot price. Because even a rising rupee in a particular month does not give banks enough confidence that it can continue rising through the next quarter or beyond that. Another reason for charging a forward premium is that banks also factor in their projections about their own forex liquidity, forex markets and economic risks and operational cost etc.

So the forward dollar price is not a big indicator of banks’ perception about the direction of exchange rates. But the forward premium — or topping over the current price of the dollar — certainly is. Back in March 2020, the forward premium on the dollar was smaller than what it was in March this year. This means that from the banks’ viewpoint, there are not as many chances of the rupee losing its value in April-June 2021.

This change in the perception is widely shared across the full spectrum of the financial sector. That is why you see research heads of brokerage houses projecting that the rupee can gain more value and rise to 150 to a dollar by June.

What then has changed the banks’ perception about the rupee-dollar parity? Primarily a meteoric rise in remittances — after the launching of Roshan Digital Accounts back in September 2020. These accounts have enabled the Pakistani diaspora to make investments in their home country’s debt, equity and real estate markets and earn far higher returns than ones prevailing in their host countries — in rupees or in even foreign currencies.

These accounts attracted $806 million between September 2020 and March 2021 — of which $212m came in March alone.

As for overall remittances, Pakistan attracted $18.743 billion between July 2020 and Feb 2021 — 24.1pc higher than $15.104bn it had received between July 2019 and Feb 2020, SBP data shows.

Those who are growing concerned about the sustainability of the recent rupee recovery are actually trying to figure out how long remittances can grow this fast. The rupee has recovered close to 8.4pc in a year, 4.4pc in Jan-March 2021 and 3.4pc in March alone.

Besides, there are a few other concerns: even if remittances continue to grow this fast, can this support the rising rupee for a longer period amidst negative growth in exports of goods and services (on the FOB value basis)? How will the rupee’s appreciation impact the import bill? And how will the inflated import bill — due to a stronger rupee — affect the exports of manufactured goods that rely on imported raw materials?

A few other things also perturb an inquisitive mind: could the rupee have risen backed by stronger remittances had the government not been amassing more of external debts, including $2.5bn through the recently launched Eurobonds? Won’t the burgeoning stock of external debts and liabilities push up external debt servicing, more so because Eurobonds have been sold on very high returns? And won’t it impact on the overall balance of payments (BOP)? By the way, Pakistan’s current account deficit and the BOP deficit are not entirely gone: they have just shrunk considerably. In July-Feb 2020-21, the current account deficit and the BOP deficit shrank to $881m and $764m, respectively, from a year ago.

These are important issues and their handling needs utmost prudence by the Ministry of Finance and the central bank. Hopefully, newly appointed Finance Minister Hammad Azhar and SBP Governor Dr Reza Baqir will work in close coordination to address these issues.

The decline in the current account deficit to just $881m in July-Feb 2020-21 is undoubtedly the biggest reason behind the rupee’s gains. But this decline was entirely because of the rise in remittances alone.

The country’s total exports of goods and services, in fact, went down to $19.87bn in July-Feb from $20.25bn a year ago. Total imports of goods and services, meanwhile, shot up to $37.29bn from $35.72bn, SBP data reveals.

As the rupee’s ascent and ongoing economic recovery are set to increase the import bills of both goods and services, pushing up merchandise and services’ exports is absolutely necessary. Otherwise, the current account deficit may start rising again from the next fiscal year, halting the rupee’s rise.

The IMF has restarted lending after a long pause under a $6bn BOP support programme and Pakistan has received a new instalment of $500m. The central bank’s forex reserves now total $13.67bn — far above $10.84bn a year ago. Things in the external sector look good.

But to make them prettier, Pakistan will have to work harder.

Published in Dawn, The Business and Finance Weekly, April 5th, 2021