Pakistan needs a permanent source of dollar inflows

However, if the plug is removed, all the water flowing in from the tap would immediately flow out of the tub

The equilibrium point would arrive when the water flowing in from the tap is sufficient enough to compensate for the water going down the drain

And Pakistan’s currency market is just not able to maintain this equilibrium

The Pakistan Muslim League-Nawaz-led (PML-N) government has adopted different means in order to increase the dollar inflow

However, all these various measures have been successful in producing one-time inflows; for example, the issuance of Eurobonds and the auction of telecom licenses

Nonetheless, these one-time inflows have contributed to the strengthening of the Pak Rupee

 On the other hand, Pakistan’s import requirements and debt repayments are continuously proving to be a drain on the country’s foreign exchange reserves

 Sooner or later, the Pak Rupee shall once again come under tremendous pressure due to dwindling dollar inflows and due to the fact that the country’s outflows are going to remain relatively constant in the foreseeable future

The recent strengthening of the dollar to a high of Rs102, or what can also be considered as a weakening of the rupee, is indicative of the future adverse trends if the present government fails to bring into existence a permanent source of dollar inflows

Some analysts may consider this latest deterioration in the value of the rupee as an outflow of short term capital, or what is also commonly known as hot or speculative capital

In an era of enhanced capital mobility, this risk of unfavourable hot capital flows shall always remain

Moreover, the government does not have the financial capability to intervene in the forex market and contain the fallout of adverse hot capital flows

The forex reserves are not sufficient enough to match the massive amounts of funds at the disposal of foreign institutional investors

Hence, we may conclude that the government will have to abandon its symptom management policies of intervening in the forex market and of providing a transitory and artificial support to the rupee

What Pakistan needs is a strategy which would allow the government to increase the dollar inflows on a permanent and sustainable basis

The Pakistani foreign exchange ‘tub’ is in extreme need of a tap which would ensure a reliable and a consistent inflow of dollars instead of sputtering to death time and again

Unfortunately, Pakistan has historically relied upon such unpredictable dollar inflows instead of formulating a strategy which would create a permanent source of inflows

The Korean War, the Afghan Jihad and the War on Terror proved to be some of the prominent eras of Pakistan’s history which reduced the country’s balance of payment difficulties for a limited period of time

However, as soon as these one-time dollar inflows came to an end, the country’s forex market once again went into a tailspin

As of now, the only source of dollar inflows which has consistently maintained its magnitude is work remittances

Hence, the government needs to enhance its export competitiveness in order to create another source of sustainable dollar inflows

Without focusing on its export sector, the country will always remain dependent on loans from the international financial institutions apart from entangling itself in foreign misadventures in exchange for financial aid

It remains to be seen what purpose the amount of $1

5 billion flew into the Pakistan Development Fund served

It is being alleged that this amount was received from Saudi Arabia

Regardless of who and for what purpose the amount was received by Pakistan, we can certainly agree upon one thing – as long as Pakistan will not restructure its forex ‘tub’, it will only end up being a pawn in the hands of other countries and will continue to serve the designs of its donors and lenders at its own expense

Date:02-Mar-2015 Reference:View Original Link