Forex crisis and its impact on the econmy

By Ali Irfan

Government officials along with foreign exchange companies should be held responsible for the current financial crisis in Pakistan. The current depletion in foreign exchange reserves and the alleged forex scandal of exchange companies involved in transferring millions of dollars abroad through illegal means added more misery to deteriorating economy.

This time the delay in conjunction with the international financial crisis diverted investor’s attention towards investment in foreign currencies rather than in the industry or stock exchange, thus it elevated their demand, the main damage then was caused by dollar dehydration, it elevated Pakistan’s foreign debt by putting massive pressure on the Pakistani rupee.

Half of our economy constitutes with the informal sector which is directly related to consumers, who showed deep interest in investing in the Gulf due to the uncertain political situation and the prolonged war on terrorism fought within Pakistani borders. Havala and Hundi are the two most popular channels of illegal transfer of foreign currency from one country to another. This smuggling of foreign currency has resulted in a massive downward slide in the country’s forex reserves, which has depleted from over $16 billion in Oct 2007 to around  $8 billion at present.

As per reports, money exchangers are alleged to have transferred billions of dollars causing irreparable damage to forex reserves and to the overall economy.  This trend and the alleged stock market manipulation caused a huge slump in the economy and share business went down rapidly. Since April 2008 the Karachi Stock Exchange had lost its 41 per cent in its 100-index.

Pakistan's current account deficit went up to 14 billion dollars during the last fiscal year 2007-08 mainly because of higher POL and commodity prices in the international market. The current account deficit stood at 6.9 billion dollar (4.8 per cent of the GDP) for year 2006-07. In 2007-08 the country's import bill of POL stood at 11.4 billion dollar against 7.3 billion dollar for 2006-07, registering a net addition of 4.1 billion dollar on this account.

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INWARD REMITTANCES

($in billion)

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          2007             2008          Difference

July     495.69          627.21          26.53%

August 985.20          1219.51          23.78%

Sept    1501.25          1,879.86          25.22%

Oct      2081.49          2,345.99          12.71%

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Inward remittances in the current fiscal year show massive increase as compared to related months of previous year, According to data as per SBP Pakistani workers have remitted huge amounts and in the consecutive months of first quarter an increase of more or less 25 per cent was seen, but decline in October shows that the ongoing economic recession have impacted deeply on overseas Pakistanis. Most of these remittances are made from Saudi Arabia and other Gulf countries. A major decline can easily be seen from statistical point of view as from July-Oct the amounts varied from 338.67, 334.12, 352.78, 252.79 million dollars in respective months. This decline added more misery to the dollar dehydrated economy thus creating more scarcity of Dollar. Dollar reached its highest ever position and crossed Rs84 in inter-bank and Rs95 in the open market. The govt's crackdown on the illegal transfer of large sums of foreign exchange by forex companies is a much welcomed but a very late move. It would have been much better if they have had made this move prior the massive transfers.

Private commercial banks are thus inviting customers by offering very high deposit rates both in saving and term deposits. While in business accounts many banking products are set free, in conjunction with this staff member even from Operations Division are instructed to capture more clients and deposits failing to which will not only effect their annual appraisal but also in some cases their desks. A particular percentage of this deposit will be awarded to them as cash reward. Same ways to handle huge liquidation differences fresh lending cases are discouraged and previous customers are requested not to avail their credit limits.

SBP took certain midterm measures to oxygen the degrading economy that included change in Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) for liquidity management, Control over KIBOR rate, increase in discount rate, encouraging aggressive deposit mobilisation in private sector and managing high deficit of previous fiscal year government abolished subsidies and increment of General Sales Tax to 16 per cent. But still the foreign reserves only mount to 9 weeks of imports; things could go better by improving law and order situation, friendly environment for exporters and businessmen and most of all a stabilised government. Democratic government’s aim to revive economy depends on ensuring peace and harmony and razing roots of terrorism in all its forms.

A much discussed $11 billion is needed to avoid complete economic fiasco and failing of the economy on most fronts. Friends of Pakistan (if we are left with any) are left with no time to realise the seriousness of the economic, judicial, and political and peace crisis Pakistan is confronting with. If this situation prolongs there is a fear of complete breakdown of the economy and this could only be stopped by supremacy of the constitution; independent judiciary and strict monitoring of outflow of capital.