Pada annonce que”Nous ne pouvons laisser croire qu’il y a un manque de devises dans le pays”.
The strengthening of the rupee is likely to be short-lived. Sooner economic fundamentals will assert themselves. We cannot continue to live beyond our means. In the absence of a coherent set of contractionary monetary and fiscal policies, the exchange rate of the rupee will , no doubt, continue to head South.
The widening current account and overall Bop deficit are all taking a back seat with the “tam tam” of meeting the target of 1 mn tourist arrivals.
A rough forecast of the current account deficit for 2022, is at 11% of GDP – more optimistic than MCB focus estimated at 14% for 2022 and 11% for 2023. The current account deficit thus remains high despite the improvement in tourism earnings (85% of 2019 earnings) in 2022, mainly because of higher import value, but also freight charges.
Even with a further improvement in tourism earnings , it is unlikely to significantly reduce the current account deficit in 2023, which will dampen GDP growth and continue to put pressure on the rupee. Increased capital and financial flows, especially by GBCs, can however contribute to relieve forex shortages.
The bop data below are in USD bn, to abstract from rupee valuation changes. It shows that even if the services account is boosted by tourism, it is unlikely to reach a surplus of USD 1 bn in 2022, as in 2018 or 2019. (e.g. freight charges higher). Whereas the goods account deficit will probably double to USD3.6 bn in 2022. The goods and services deficit will probably be around USD3 bn.
Primary and secondary income largely reflect Global Business. Unless there is a stronger recovery in primary income in H2 2022, the current account deficit in 2022 will be around USD1.4 bn , or twice higher than in 2019.
The financial account offsets the current account deficit. The financial account net of reserve assets (FA-RA) has increased to a high of USD2.9 bn in 2021, with greater global business capital inflows, improved direct investment inflows, mostly for real estate, and more official borrowings (EFF) by Govt and BoM as from 2020.
Net of EFF, FA-RA was nil in the H1 2022. It appears that Global business inflows (GBLH FA) have weakened. Following record net inflows of USD3 bn in 2021, there was a net outflow of USD0.7 bn in H1 2022. However, this could very well reverse in H2 2022. But for H1, the BoP deficit is some 0.5 billion dollars or some Rs 22 billion.
Conclusion
But it is not likely that better tourism performance alone will improve the forex liquidity situation. The demand for imports is high, and the terms of trade are turning adverse. Direct investment inflows could play a more positive role, but that would represent only USD0.2 bn for 2022. More EFF( exceptional foreign financing), maybe, to loosen the pressures on the exchange rate!
That’s the reality, dear Pada !
