For business information, annual reports, laws, ordinances, regulations and articles.

	Web Paksearch.com

In Excel.

In Excel.

In Excel.

In Excel.

In Excel.

Transactions with the IMF during FY00 are shown in Table VIII.9. Use of Fund credit (purchases minus repurchases) stood at US$ 279.3 million. In view of the misreporting of fiscal data, Pakistan agreed to voluntarily repurchase SDR 40.9 million (or US$ 53.9 million) in May 2000.

Exchange rate policy
Unlike FY99 when the exchange rate regime witnessed some extraordinary developments, FY00 was surprisingly calm. Facing an acute foreign exchange crunch following the freeze of FCAs and the international sanctions, SBP moved to a two-tier (composite) exchange rate system in July 1998. This weighted average composite rate between the newly introduced Floating Interbank Rate (FIBR) and the official rate was moved from 50:50 when introduced to 80:20 (in favor of FIBR) in December 1998, to 95:5 in March 1999, and eventually unified on 19th May 1999, where FIBR became the official exchange rate. These changes were made to comply with IMF’s Article VIII, which disallows member countries from maintaining a multiple exchange rate system unless under exceptional circumstances. However, since Pakistan was facing this situation following the nuclear tests, a gradual phasing out was allowed.

Looking specifically at the FIBR selling rate, the week following the unification witnessed a fair bit of volatility, as the Rupee/Dollar rate increased from Rs 50.99 (composite rate) on 18th May 1999, to Rs 52.60 (FIBR) on 22nd May, closing at Rs 52.06 at the end of the week on 29th May 1999. In an effort to calm both exporters and importers, whose combined actions created a shortage of foreign currency in the interbank market, SBP began selectively intervening to provide liquidity for lumpy payments, but more broadly, began smoothing out the volume of interbank transactions. By the second week of June 1999, these actions stabilized the market and FIBR (sell) did not breach Rs 51.90 till 1st June 2000 (see Figure VIII.10). At the close of the fiscal year, the FIBR closed at Rs 52.30, a mere 1 percent depreciation during the course of the year. During FY98 and FY99, the corresponding adjustment in the value of the Rupee was 12.04 and 10.49 percent, respectively.

Policy changes to facilitate this stabilization are listed below:

On 22nd June 1999, Authorized Dealers (ADs) were advised not to enter into forward transactions with customers for a period of less than 1-month. Also, ADs were prohibited from transacting in the interbank market unless they had an approved transaction to back it up. These restrictions were meant to limit speculation in the interbank market.

On 3rd July 1999, a code of conduct for money changers (MCs) was issued. In it, only MCs with a valid license have the right to buy and sell foreign exchange in Pakistan. Furthermore, MCs are only allowed to deal in notes and currency and not travelers checks or telegraphic transfers. The relevant circular also lists that bid/offer rates must be displayed, permanent books are to be maintained by MCs, all transactions are to be backed by receipts/vouchers, and all public sector corporations, members of the diplomatic corps and employees of international organizations are prohibited from dealing with moneychangers.

Following the change in government in October 1999, MCs’ operations were temporarily suspended between 13th to 24th October, while banks were closed on 13th October. Also as a pre-emptive move to contain a possible panic in the foreign exchange market, on 14th October 1999, minimum cash import margins were imposed on all non-essential imports. These proved to be short-lived, as margins on industrial raw material and machinery were withdrawn by the end of the month. Remaining margins on non-essential imports were gradually removed as the foreign exchange position stabilized. From 1st July 2000, all remaining margin requirements were removed.

Falling inflation rates and a reduction in the interest rate differential, provided support to the exchange rate. More specifically, the inflation differential between Pakistan and its trading partners/competitors, which has a significant impact on the value of the Rupee, declined to 3.3 percent in FY00 from 10.4 percent in FY97, thus requiring smaller adjustments to maintain purchasing power parity. The decline in the overall interest rates in Pakistan not only reduced the interest component in production costs, but also narrowed the interest differential between domestic and international markets. Consequently, smaller adjustments in the exchange rate were required to maintain the interest parity condition.

There has been some criticism of the strict management of the exchange rate during FY00. It is argued that the approach adopted by the SBP to stabilize the exchange rate led to a weakening of market signals reflecting the demand and supply mismatch. However, the resulting exchange rate was not as unrealistic as perceived. Since outright purchases do not enter the interbank market directly, their use in financing the external imbalance had to be intermediated through SBP. This implies that there were net sales of foreign exchange from SBP to the interbank market. As stated earlier, SBP stood ready to sell foreign exchange at the interbank rate for lumpy payments for oil and debt. Since the interbank market is in surplus if oil and debt payments are excluded, SBP was able to manage the bulk of these payments directly from its reserves, but was also able to buy hard currency when the market was long in Dollars. As a result of such intervention, the interbank transactions were implemented at an approximate rate of Rs 51.90 per US Dollar. Having said this, importers (or other buyers of hard currency) did not have to offer higher rates to purchase hard currency from the interbank for approved transactions.

Critics have also stated that the exchange rate stability was attained at the cost of reduced profit margins of commercial banks. However, profit margins on foreign exchange transactions were not lowered by decree, but as a result of increased competition amongst banks as customers were free to sell foreign exchange to any bank of their choice. Furthermore, declining domestic interest rates and very weak devaluation expectations during the first three quarters of FY00, also led to lower premiums on forward bookings, thereby reducing profit margins in the banking sector.

Nevertheless, exchange rate stability involved certain direct costs in the form of a decline in foreign exchange reserves and SBP losses on account of outright purchases from the kerb market. As purchases were placed directly into SBP’s liquid foreign exchange reserves, an interruption in purchases (especially after April 2000), led to the gradual fall in Pakistan’s reserves (see Figure VIII.3).

The 3-month forward premium (on Rupee purchases) that reflect market expectations of future exchange rate changes are shown in Figure VIII.11. Some salient features are:

After the float in May 1999, expectations were volatile but not unidirectional;
Induced stability dampened market expectations of future devaluation;
Some unease with the change in government, but forward premiums subsequently declined (end-November 1999);
Following this calm, forward premium became negative (end-December 1999);
IMF mission arrived in May 2000;
First adjustment from Rs 52.46 on 21-Jul-00 to Rs 54.50 on 21-Aug-00 (marked x in the graph);
Second adjustment from Rs 54.85 on 18-Sep-00 to Rs 59.68 on 6-Oct-00 (marked o in the graph).

Open market
With the stability shown in the official rate, the kerb selling rate remained within a narrow range of Rs 53.7 to Rs 55.15. Compared to a peak of Rs 64.25 in September 1998, there was a clear reduction in the kerb premium (see Figure VIII.10). Against an average kerb premium of 8.2 percent during the course of FY99, this premium was lower and more stable at 4.5 percent during FY00. As shown in Figure VIII.10, the sharp fall in the kerb premium bottomed out in April 1999, after which it increased and started FY00 at 4.3 percent (sell rate) and closed the year at 5.2 percent. This stability is not limited to year-end dates, as the monthly average of the mid rate (bid and offer) during the year remained within a range of 4.2 and 5.2 percent. The story in FY99 was dramatically different; the monthly average mid rate premium peaked in July 1998 (27.1 percent) and again in September 1998 when it hit 27.9 percent. This stability in FY00 dampened market expectations and undermined the incentive to dollarize domestic savings.

Appendix VIII.1: Services and Capital Account
This section explains the item-by-item details of services and Pakistan’s capital account.

Services Account
Looking at specific items in the current account (see Table 8.2 in the Statistical Annexure for greater details), interest payments on foreign loans continue to grow relative to FY99. Although interest payments to the IFIs have actually been made as contracted, actual payments to official creditors are lower in FY99 and FY00 than shown in Table 8.2.Item 5.3 in this table also includes interest payments on new FCAs and Special US$ Bonds (US$ 86 million in FY00 vs. zero in FY99), servicing of suppliers credit and pay as you earn (PAYE) arrangements, profit and dividend payments by multinational companies (MNCs), and any returns on repatriable loans. These payments have actually been made, unlike interest payments that have been rescheduled. In addition to interest payments, other service payments are an important component of the net outflows in the current account.

In terms of shipment payments, debit entries refer to payments to non-Pakistani shipping companies responsible for handling Pakistan’s trade. Credit items reflect earnings of Pakistani companies on trade shipments. The fall in net shipment payments in FY00, despite a rise in total trade volume reflects the fact that Pakistani shipping companies handled more trade this year compared to last year. However, the imbalance suggests that domestic shipping is still unable to handle a large part of Pakistan’s trade transactions.

Other transportation refers to passenger travel and charges for the usage of ports and airports in the country. The minor surpluses in this head could be improved upon.

Travel includes all tourist receipts and official foreign exchange expenditures arising from Pakistanis traveling abroad. However, compared to the foreign currency spent before the nuclear tests, these expenses have fallen sharply since FY96 and FY97, when expenditures of US$ 609 and 644 million were incurred. Interestingly enough, these expenses already started tapering off in FY98. Despite the fact that between June and October 1998, individuals were asked to procure foreign exchange for travel, health and education from the kerb market to ease the burden on official reserves, travel expenditures did not show much of an increase in FY00 relative to FY99.

Other goods, services & income – official (item 6.1), refers to inflows and outflows on account of foreign missions operating in Pakistan and our missions abroad; it also includes hard currency payments for technical assistance tied to IFI assistance. Item 6.1 also includes all other flows related to royalties, bank commissions and charges, technical/legal fees, and sundry insurance payments. In FY00, the payments under this head declined significantly to US$ 163.0 million from US$ 270.0 million in FY99.

Capital Account
Net foreign investment
In overall terms, against actual inflows of US$ 570 million during FY99, the following year witnessed net outflows of US$ 77 million. More specifically, direct foreign investment showed almost the same inflow in the two years, while portfolio investment showed a sharp reversal. Although Table 8.2 in the Statistical Annexure does show inflows and outflows, portfolio investment by foreigners is only available on a net basis. Against inflows of US$ 142 million in FY99, portfolio investment in Pakistan posted a significant outflow of US$ 550 million in FY00, primarily due to the restructuring of Eurobonds (US$ 610 million) and a fall in conversions into special US$ bonds (from US$ 251 million in FY99 to US$ 36 million in FY00). Portfolio investment in the stock markets showed an impressive increase from US$ 28 million in FY99 to US$ 73 million in FY00, despite the fact that repatriation was much easier relative to FY99.

Long-term capital (official)
This refers to contractual debt over one year maturity, which recorded a massive decline from US$ 1,176 million in FY99 to US$ 112 million in FY00. More specifically, foreign assistance from IFIs (excluding the IMF) and sovereign governments to GOP, showed a fall of US$ 503 million mainly due to lower disbursement under project and food aid from consortium and non-consortium countries (item 12.2). Non-food aid also contracted marginally despite inflows under ADB’s Capital Market Development Program Loan (US$ 125 million) and the Saudi Oil facility. Project aid generally takes the shape of foreign exchange loans and grants for the procurement of equipment and supply of services. Food aid, on the other hand, comprises of foodstuffs, such as wheat and edible oils while non-food aid comprises of loans and grants from non-traditional sources, utilized for commercial imports and balance of payment support. Item 12.4 shows all IFI loans that are backed by securities issued by SBP and certain deposits with SBP. As mentioned earlier, lack of IFI assistance in FY00 is largely responsible for this fall in inflows.

Long-term capital (deposit money banks)
This reflects the inability (or unwillingness) of commercial banks and NBFIs to change their holdings of long-term assets/liabilities. Historically, this item has not played a large role in Pakistan’s capital account.

Long-term capital (others)
In this head, the relevant items are non-contractual flows from parent companies to MNCs operating in Pakistan, and flow of funds related to suppliers credit and PAYE schemes. In terms of the former (item 14.3 which is only available on a net basis); this shows that inflows to MNCs operating in Pakistan fell in FY00. The fate of suppliers credit is that repayments continued to increase but could not be matched by fresh credit to finance Pakistan’s imports.

Short-term capital (official)
The net impact in this head shows an improvement, but this is on account of the very nature of such flows. Short-term capital is defined as loan obligations of 1-year maturity or less. Since a large part of such inflows stopped following the nuclear tests, the repayment stream was concentrated within FY99 itself. Item 15.2 shows that ST loans procured by the government for debt servicing fell sharply during FY99, but repayment obligations from FY98 remained. Item 15.3 represents similar obligations of SBP.

Short-term capital (deposit money banks)
Under this head, outflows increased from US$ 1.3 billion to US$ 1.8 billion for the years FY99 and FY00, respectively, due to changes in outstanding export bills held by commercial banks. The bulk of hard currency flows shown by item 16.5, refers to non-resident FCAs (individual and institutional) kept with commercial banks and special deposits from certain central banks. A certain component of FE 45 swap funds brought in by commercial banks is also reflected under this head.

Short-term capital (others)
Once again, this is largely on account of non-resident (institutional) FCAs placed with NBFIs. Unlike non-resident FCAs placed in banks, the repayment stream of swaps brought in by NBFIs fell sharply in FY00 for two reasons: (1) a significant fraction of these FCAs were converted to Rupees during FY00 (see errors and omissions), and (2) repatriable payments by foreign companies that were temporarily delayed in FY99, but subsequently relaxed the next year.