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At Lahore Chamber of Commerce &
Industry on Tuesday March 28, 2017
MONEY:
• End of gold-standard on August 15 1971 _______ which linked currency’s value with
gold……start of volatility in gold and prices of other commodities and currencies.
• New scenario----- US dollar emerged as ‘Fiat Currency’. It is the currency that the
government has, declared to be legal tender --------- not backed by physical commodity.
• OPEC as a cartel…..Use of oil as a weapon in 1974…..leading to higher oil
prices….followed by massive transfer of wealth from oil consuming countries to oil
exporting countries……petro-dollars and a phenomena of their recycling.
• We all want it, work for it and think about it and use it for measurement, in our day to
day life.
• It is being recognized with multiple names, such as…….
• SBP, in Pakistan, is the only issuing authority.
FACTS ABOUT PAKISTAN’S ECONOMY:
Overseas Pakistanis had sent home a record amount of about $20 billion during
2015/2016. ……growth of 6.38%, compared with $18.719 billion received during fiscal
year 2014/2015. ….Expected to fall by 2%.
On March 24, 2017
Forex Reserves: $22.27bn….being maintained,
Through foreign borrowing.
KSE-100: 48,971.05
Interbank: 104.85
Open Mkt rate 106.40
Private sector borrowing increased by Rs 349 billions.
Projected inflation at 5%,during this year….within target.
Remittances: $12.36bn July-Feb FY17. Remittances are having 2% drops as
compared to the relevant period of the last year.
Exports: $13.32bn July-Feb FY17
Trade Balance: $ - 20.20bn July-Feb FY17
Annual 2015/2016
GDP Rs.29.598 trillion
Fiscal Deficit: 4.6 percent, amounting to $ 5.5 billions, which is increasing as
compared to the previous year, due to falling exports and declining remittances.
Stock Market Capitalization…. around Dollars 92 billions…..Rs 9.647 trillions.
Market Capitalization to GDP ratio …Around 30%
SBP’s policy- rate at 5.75% unchanged since the last 10 months.
Total National Debt: Rs 22.5 Trillions
Debt to GDP Ration: Around 69%.....violates Debt Limitation Act
FOREIGN EXCHANGE:
Foreign exchange is the exchange of one currency into another, based on the value
determined by Demand and Supply.
FOREIGN EXCHANGE RESERVES:
It is the money or other assets held by central Bank or other monetary authority, so
that it can pay back, if need be, its liabilities.
Some countries are now converting their Foreign Exchange Reserves into Sovereign
wealth Funds.
The size of the Foreign Exchange Reserves is markedly important now, especially the
post-globalization era, due to increased global trade, capital flows and currency
volatility.
HOW FOREIGN EXCHANGE RESERVES ARE BUILT-UP?
Through:
• Exports.
• Inward Remittances.
• Foreign Direct Investment (FDI’s)
• Foreign Portfolio Investments. (FPI’s)
• Official Development Assistance (ODA) ---through multi-lateral institutions.
• Borrowing through International Capital Markets.
• Bilateral Arrangements.
STRATEGIZING THEIR BUILD-UP:
• Any one or more of the said potential sources can be exploited, depending
on the country-specific potential, e.g. Tourism in Thailand is 10% of its GDP.
Remittances constitute 10% of the GDP of Philippines. China’s exports are %
of its GDP.
• Good policies can lead to leveraging the potential benefits.
• Bad policies can discourage capital accumulation, increase inflation,
creation of asset bubbles and their subsequent bursting and unnecessary
currency imbalance, which may produce negative results…….as it has
happened in Brazil.
THE IMPORTANCE OF FOREIGN EXCHANGE RESERVES:
• With ‘Globalization’, the size of Foreign Exchange Reserves has become very
important, due to more global trade, more international migration of workers and
movement of capital flows, in search of better opportunities.
• Most of the Global trade is done in U.S Dollars, as a medium of Exchange; so
healthy Foreign Exchange Reserve is the pressing requirement.
• Increases the confidence in the monetary and exchange rate policies of the
Government. It results into having new choices/ options, for economic
management.
• During any crisis, foreign exchange reserves come to the rescue of any country
to absorb the distress, related to such crisis.
• Enhances the capacity of the Central Bank of the country to intervene in the
foreign exchange market to manage exchange rate stability.
Add to the comfort of market participants that domestic currency is backed by
external assets and hence it also helps the equity markets of the country with
lesser country risk, better credit rating, more Foreign Portfolio investments and
stable exchange rate.
An important catalyst for poverty alleviation, economic growth and
development. Helps to import raw material, machinery and capital goods, fuel
and essential commodities, to meet the shortages and follow the growth
trajectory. It is the most important part of the toolkit, in economic management
and especially for containing trade deficits and maintaining exchange-rate
stability.
It results into creation of more jobs and reduces social imbalances.
POLICIES OF THE GOVERNMENT IN PAKISTAN:
• By and large, Government policies in Pakistan are investment friendly and
continuously, being improved to attract FDI’s, FPI’s and Remittances. Government is
cognizant about its importance, because it has outweighed all other policy options.
• There is no tax on remittances. Some countries had imposed taxes to contain the
asset bubbles and inflation
• In case of FDI’s, foreigners can have 100% ownership and can repatriate the profits
and the funds, easily.
• Besides improved law and order situation, the government is spending decent
amount on developing infrastructure, which is an imperative.
• SBP has recently allowed non-residents, to participate in margin trading through
SACRA account.
• During the current year, Government has some how managed the exchange-rate
stability……..it should be made sustainable.
• There are other incentives………..
• Undoubtedly, there is always room for improvement, for which , the focus will be on
attracting remittances.
SUGGESTIONS:
• Creation of conducive environment, for confidence building.
• Making policies more practicable and predictable…..Government should work
more closely with Overseas Chamber of Commerce and rely on its feedback.
• To have efficient Dispute Resolution System in place. LCCI’s role towards this
end, is appreciable.
• There should be series of incentives like efficiency, cost effectiveness, tax
exemptions / discounts, etc..., minimum for 3 – 5 years.
• State Bank of Pakistan (SBP) should allow reduced interest rate, for such
foreign investors, on a part of their Pak-Rupee borrowing, for making investments
in prioritized areas.
• Broadening of the tax-treaty network, for providing double taxation relief.
• Accumulation of much needed capital, the expatriate Pakistanis should not
have, higher Capital Gain Tax (CGT) rate, even if they are not filers.
• The expatriate specific, mid-term to long-term, U.S Dollar Bond floatation,
should be designed ensuring its tradability and redemption.
• The international floatation of foreign currency bonds, should have
preferential allocation, for expatriate Pakistanis, on matching rates with lower
thresholds, of around $20,000/- or so….
• Raising of funds, on long-term basis from expatriate Pakistanis, ensuring
security, better yield, in the infra-structure projects like transport, airports,
shipping and ports, dams, urban water supplies.
• New listings on the stock-exchange, should have quota for expatriate
Pakistanis, if investment is being made in foreign-exchange.
• Privatization of State Owned Entities (SOE’s) through the Stock Exchange,
should have quota, for expatriate Pakistanis, who are willing to make
investments, in Foreign Exchange.
HOW FOREIGN EXCHANGE RESERVES ARE
BUILT-UP?
Through,
• Exports.
• Inward Remittances.
• Foreign Direct Investment (FDI’s)
• Official Development Assistance
..(ODA) ---through multi-lateral
..institutions.
• Borrowing through International ..Capital
Markets.
• Bilateral Arrangements.
Serial #
Country
Reserves Dollar $
001
China
3.00 - Trillions
002
Japan
1.20 - Trillions
003
Switzerland
685.00 - Billions
004
India
365.00 - Billions
005
Germany
200.00 - Billions
006
U.K
163.00 - Billions
007
Turkey
123.00 - Billions
008
U.S.A
116.00 - Billions
009
Bangladesh
32.50 - Billions
010
Pakistan
22.00 - Billions