ISLAMABAD: State Bank of Pakistan (SBP) said on Tuesday that further depreciation of Pak rupee entirely depends on export-import data and home remittances in the coming months.

This indication came from the SBP officials at a meeting of Senate Committee on Commerce and Textile presided over by Senator Shibli Faraz. Minister for Commerce and Textile, Pervaiz Malik represented his Ministry along with his team. The committee’s proceedings were declared in-camera for discussion on the issue of current depreciation. However, later on journalists were allowed to cover the proceedings.

Sources in the meeting quoted an official of SBP as saying that he is presenting facts and figures on the basis of which the central bank thought it necessary to depreciate the rupee.

He said that during the first five months of current fiscal year (from July 1, 2017 to November 2017), current account deficit was recorded at $ 6.43 billion as compared to $ 3.37 billion during the same period of last year which implies an increase of above 90 per cent. The basic reason for the increase in fiscal deficit is increase in imports relative to exports.

He said, exports increased by 11.5 per cent whereas imports rose by 23 per cent which led to a massive increase in the current account deficit due to which country’s reserves decreased by $ 3.4 billion by November 30, 2017 from $ 12.6 billion as compared to $ 16 billion as on June 30, 2017.

Due to a significant drop in foreign exchange reserves, SBP was compelled to take steps to deal with the situation. Some steps were initiated by the federal government including measures to discourage unnecessary imports for example the imposition of Regulatory Duty (RD) and cash margin on non essential items in addition to an export incentive package. The purpose of all these steps was to improve balance of payments.

SBP also continuously monitored the higher increase in imports compared to exports and slow down in home remittances with growth at just 1.3 percent.

According to him, there was a substantial decrease in reserves recently; the way to address this phenomenon was depreciation of the rupee by about 5 per cent on December 8, 2017.

“Our assessment is that with this step the pace of growth in imports will decline and exports will be encouraged,” he added.

On a question raised by one of the Senators as to what extent SBP intends to further depreciate Pak Rupee, the SBP official stated that further steps would be taken on the basis of fresh data of balance of payments.

“The fresh data of balance of payment will determine whether current depreciation was enough or not and obviously it will depend on how the balance of payment position is unfolded in coming months. On the basis of this we will determine how we have to proceed,” he stated.

According to SBP, official the impact of RD on imports and depreciation of about 5 per cent will have a positive impact in the coming months.

Another Senator asked if the SBP conducted this exercise last year; SBP official stated that the Central Bank conducts such an exercise each year as a continuous process.

Chairman Standing Committee maintained that SBP is a competent regulator but stated that SBP’s futuristic view should be very clear notably that Pakistan is very weak on the investment side while other countries rely on investment.

SBP official replied that there was a significant increase in Foreign Direct Investment (FDI) during the last five months of current fiscal year which was around $ 1.5 billion showing a growth of 65 per cent.

According to him, when reserves dropped to $ 12 billion import coverage also decreased, adding that SBP intends not to let reserves drop lower than $ 14 billion. Currently SBP’s target is to maintain 2.5 month to 3 months import coverage.

Chairman Standing Committee also enquired why SBP releases its figures so late, to which the official replied that he can share reserves’ data on a daily basis but that the current account data is collected from across the country which takes time.

Shibli Faraz enquired that the rupee was overvalued by 20 per cent and with Pakistan already depreciating the currency by around five per cent would the balance of the over valuation be spread out? The SBP official said that the the Central Bank does not prepare plans for this purpose. Another SBP official stated that it will be determined by market forces keeping in view the data of exports, imports and remittances.

Secretary Textile Division, Hasan Iqbal informed the committee that the stock of Non Performing Loans (NPLs) of textile sector stood at Rs 188 billion. He said four or five companies are pursuing their cases, adding that each company has different issues.

He cited SBP as saying that the companies were in profit but they found higher profits in the real estate business and they opted for it. The textile companies bought thousands of acres of land. He said NPLs of Rs 10 billion have already been settled.

SBP wants the textile companies to inject at least 10 per cent equity to revive sick units and only then would SBP ask commercial banks to consider loan rescheduling.

Senator Ilyas Bilour said that no company intends to wind up its business. Senator Shibli Faraz said that the government cannot force commercial banks to reschedule loans.

SBP officials present in the meeting said that commercial banks do rescheduling of loans with ten per cent payment. SBP official stated that private sector loans have increased to Rs 868 billion from Rs 784 billion last year.

Minister for Commerce and Textile, Pervaiz Malik said he personally took up this issue with the Governor SBP. The companies want a waiver of interest and are ready to pay principal amount. However, private banks did not agree to this proposal.

Secretary Textile Division said that Pakistan can achieve exports of $ 30 billion in textile which is still at $ 14 billion due to different reasons.

The committee decided to hold another meeting to discuss this issue in detail to sort out the issues of NPLs.

Ministry of Commerce and Textile in its written comments said that it has been observed that most Asian currencies have been depreciating against the USD in the last 5 years. This largely reflects the currency war that central banks have been waging against one another in order to protect their export industries. As an emerging market, many of the Asian countries are heavily reliant on export industries (i.e. manufacturing) to grow their economics and cheaper currencies are a major tool to make a nation’s products cheaper than other nations’. The net effect has been that everyone’s currencies have devalued; effectively negating the simulative effect those exchange rates could have on exports. However, Pakistan continued to maintain an overvalued exchange rate that made Pakistan’s exports uncompetitive vis-a-vis regional competitors. The current devaluation would enable Pak rupees to be at parity with the regional currencies, which is believed to be highly overvalued as compared to its real exchange rate.

According to Textile Division’s estimates, the current move will reinforce Government’s effort to enhance export competitiveness in the international market and foster exports’ growth by 10%. Furthermore, the increase in local demand would incentivize local firms to capture market for substitutable products. However, the sticky effect on the imports of inelastic goods would make imports expensive and will continue to pose challenge for trade balance.