Country needs more non-debt creating inflows

Since the beginning of this fiscal year, the interbank foreign exchange market has been operating calmly - thanks to depressed demand for import dollars.

Pakistan's merchandise import bill has been falling. Banks are now meeting importers' demand for dollars with relative ease. In the last fiscal year, they had to struggle on a daily basis to finance the import letters of credit of their clients.

The reduction in the average merchandise import bill from $4.56 billion per month in the entire 2018-19 to $3.81bn per month in the first five months of 2019-20 has made the bankers' job of squaring their exchange positions easier.

While trying to meet daily dollar demand with the daily supplies of foreign exchange via exports and remittances etc, banks often have to make a drawdown on their stocks of foreign currency (FCY) deposits. And, sometimes, the central bank has to arrange dollars for them through a handful of central banking tools, including short-term dollarrupee swaps. Since the beginning of this fiscal year, the State Bank of Pakistan (SBP) has not completely shuttered the swaps window. But it has minimised its intervention in the interbank market to meet some requirements of the ongoing IMF lending programme.

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A lower current account deficit has raised the level of interbank foreign exchange liquidity

This should have ideally resulted in increased reliance of banks on their FCY deposits for meeting dollar demand of their clients. But the decline in the import bill has helped banks draw less from FCY deposits despite the fact that they now visit the SBP's dollar-rupee swap window infrequently.

In 2018-19, the banks' drawdown on FCY deposits averaged over $588 million per month. But in the first five months of this fiscal year, the monthly average has fallen to less than $517m, recently released SBP data reveals.

Smaller spending on import financing out of FCY deposits has created room for banks to increase pre-shipment and post-shipment foreign exchange spending on exports out of the same deposits. During 2018-19, the banks' average monthly pre-shipment export financing out of FCY deposits stood at $90.5m.

But this average just doubled to $181.2m per month for the five months of this fiscal year. Post-shipment financing out of FCY deposits averaged at $133.8m per month in 2018-19. This monthly average during the first five months of this fiscal year, however, shot up to $152m, data shows.

After facing external-account difficulties in 2017-18 and 2018-19, the country has managed to correct some imbalances during this fiscal year. Most notably, the current account deficit that was at an all-time high of $19.89bn in 2017-18 and was still at $13.83bn in 2018-19 has shrunk. This deficit has come down to just $1.47bn in the first four months of 2019-20 from $5.56bn a year ago.

This development, despite the fact that the overall balance of payment still remains negative by $1.16bn, has raised the level of interbank foreign exchange liquidity. And that, in turn, has emboldened the SBP to allow banks to entertain foreign exchange demand from their clients a bit more liberally.

Such clients include importers of goods and services, foreign companies and foreigners in Pakistan repatriating foreign exchange back home - and Pakistanis requiring foreign exchange for overseas visits or financing educational and medical expenses of their loved ones abroad.

Since mid-November, banks have been making advance import payments at the rate of $10,000 per invoice on behalf of all eligible manufacturing companies instead of just those that also export their products. Similarly, as a token of its growing confidence in foreign exchange liquidity in the interbank market, the SBP has also allowed banks to arrange up to $10,000 to individual or corporate clients for hiring services of foreigners without its prior permission.