A black hole for assistance?

Pakistan has entered a dangerous black hole from where it may no longer qualify for any kind of financial assistance at least from the International Bank for Reconstruction and Development (IBRD) as the country’s official foreign currency reserves are fast depleting. Until now we were among a handful of countries that qualified for IBRD assistance as well as International Development Association (IDA) loans because of our creditworthiness. To counter this crisis the country must have official foreign currency reserves equivalent to three months of the import bill. Currency reserves, as recorded in the first week of August, now stand at $14.3 billion which includes $3.9 billion in short-term borrowings by the State Bank of Pakistan. So it is safe to count our central bank’s net reserves at $10.4 billion — if short-term forward contracts are excluded of course.

There are fears within government circles that gross foreign currency reserves may eventually fall below the threshold of the three-month import cover as early as the end of this month. At any rate this could happen also by the first week of September which means that the finance minister has no more than four weeks to navigate a way out of these choppy seas.

Adequate measures must be found to stem the decline and prop up foreign currency reserves which have been steadily falling since the end of the International Monetary Fund’s (IMF) assistance programme 11 months ago. In all this time our official foreign currency reserves declined by as much as $4.2 billion. In the event that Pakistan is declared ineligible for IBRD assistance the country would have to brace up for fresh challenges over its status of creditworthiness.

For its part, the finance ministry is relying on a rally in the coming months. Such optimism, though perhaps unfounded, is built around the expectation that exports and remittances would neatly pick up the slack. In the month of July 2017 alone the ministry has pointed out a 10.5% increase in exports and a growth of 16% in remittances. The government also expects a significant increase in foreign direct investment and other inflows. Other measures are going to be finalised soon. We watch with interest.

Published in The Express Tribune, August 16^th, 2017.

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