Exchange Rate Policy

Thanks Amin Saleh for this informative piece.

But it appears that Market Street is getting killed in CHOWK ratings
these days.

Ras

ahmedmadani,

Your question about about whether by acquiring foreign exchange and printing local currency can the central bank help or hurt the economy.

The answer, unfortunately, is not straight forward. The key lies in understanding the tools that the Central Bank has at its disposal and how it uses it.

At the beginning of the year, the Central Bank forecasts the pace at which the economy can reasonably grow without creating inflationary pressure in excess of what it estimates. In this regard, it establishes guidelines on how it will support this growth by increasing the monetary base of the economy (money supply - m0). The m0 can be increased as soon as the government runs a budget deficit or if the existing stock of government debt held by the banking sector is bought back by the central bank. Another way of doing this is by buying hard currencies from the banking sector. As long as the inflation is kept within acceptable range the central bank can expand the monetary base with loss of creditability. For example, Bank of Japan has been expanding the monetary base at a rapid pace without stroking inflation.

The base answer is yes the Central Bank has been printing money when they purchase foreign exchange but no at this time the economy is not at risk as because the other sectors of the economy require the infusion of liquidity.

On a fundamental basis, the value of the rupee would diminish only if the level of inflation in Pakistan would be significantly different than that of its trade partners.

However, given the current infusion of hard currencies by overseas Pakistani, this is not a serious concern. And in fact the imbalance between the demand and supply of hard currencies has had the impact of rupee gaining strength.

The overseas Pakistani have been participating in price level increase in all asset classes, like property and stock market. These funds have also found their way into National Savings Schemes. I would think that these funds would be disproportionately would be invested in property (stock market is difficult for the non-residents to access).

The stock market rise has been, more to do with the interest rate decreases which motivated institutional investors (provident funds and insurance companies) to chase stocks which had a higher cash yield and return on equity than what was offered by Pakistan Investment Bonds (NSS is off limits for these investors).

While the State Bank of Pakistan has been able to buy a few billion USD in the last 2 years, Bank of Japan buys the same amount of USD every couple of months. So buying USD is not really a problem (its just a tool of monetary management).

In fact a healthy foreign exchange reserve can help the central bank avoid currency volatility that may occur in times of political or economic uncertainty.

Foreign investment show that investors have confidence that the economy has potential to grow and give profits to the investors. The foreign exchange reserves does not convey this message (again see the Japanese experience, high reserves but economy is contracting).

Israel has a population of 4 million and gets 4 billion in aid from the usa that translates into 1000 usd per person (as compared to per capita income of 400 usd in Pakistan). Having said that I am not sure your basis of saying that Israel is richer than Saudi Arabia.

It is a myth that the Middle East is completely reliant on oil. The truth is that they have a significantly large investment base that can sustain their lifestyle. In addition, given half an opportunity, a sizable population would move to the middle east even today. Dubai has started a scheme for expatriate to own property and there has been good interest there. The motivating factor is renewable visa without sponsorship.

TAP will be a private sector initiative, and let me assure you that it would only go through if it makes economic sense. TAP can only expect royalty if the project is economic. And these three countries would obviously ensure that some royalty comes their way than nothing coming their way. And the fall out benefits are the fossil fuel that is important to their industry that would also be part of the deal.

Thank you very much Mr. A.Saleh. I am professional in hospatality business area with second best four star hotel on Dr. Ziauddin road. catering to foreign guests so no little about dollars.

I will like you to answer following practice followed by reserve bank. In

recent years Bank is buying money on market. As central bank can print

money that way is economy is helped or hurt.

As per bank 1.5 Billion dollars were brought in open market by reserve

bank and money was paid in our currency. We have more internal debt than external.

Question from where they brought this money?

Or tthey just ran printing presses?

what happened to introduction of this about over 100 Billion rupees?

Does this huge circulation of money diminishes value of currency?

Do you this 100Billion used in buying dollras ended up in Karachi stock

resulting extraordinary gains ( I think our market had best results in world)

Do you think that money started moving real estate values which result

ed in large increases in real estate.

Are there any downfalls in central bank buying such huge large dollars on

open market or is healthy as bank can get best deals.

Why other central banks avoid this practices or they follow similar practic

es?

We have about 10 Billion dollars why then we say we have no foreign

investments? Or it shows it not dollars but lack of skilled human capital

deficit is more critical ?

Please tell us countries seating on huge oils like iran , saudi, libiya are

suffering deficiets., in fact larger than pakistan. Do you think natural wea

lth does not mean good but more backwardness as people become lazy a

nd stupid? It appears the deep laying oil is useless but who bring up and

and value addition is everything? Due to modern technology and

transportation of material and goods and services owning of natural

resources is not big thing. (Israel is far richer than S. arabia even after

excluding american out right gifts.)

Do you think as oil depletes oil rich regions will sink to poverty and

revert to old backward ways?

Lastly what is possibility of TAP pipe line. It is expected to cost 3 billion

dollars in construction. I have talked to guests in our Hotel from oil

industry they told me its just talking prices if real prices are told pipe

will be dead before start. I am told it may cost 5 Billion. Have you heard any thing about.


Interest on 5 billion will be about 250 million, afghan wants 150 million

annually, pakistan 400 million, Turkemen section will be atleast 150

million. That is about 950 million per annum. Is there demand in

pakistan for that large amount to overcome costs. There will be great

insurance costs due to everpresent blasting. Recently Sui gas pipelines

are damaged on regular basis can it repeat ? I do not expect India even

if it decides to draw much amount ( they may go for bangla or their own

gas fields on east coast) to change financial equation. As a economist is it viable?

Sir I like your article. Unfortunately expak does not care about economy

they want free glory and after glowof Indopak war, disregard them as

at first boom of guns these patriots will run away with their dollars. I will

strongly encourage you to write abot economy. Please do not get

discouraged as if every body does nothing on economic subjects what is

left but empty slogans.

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