Forex reserves have once again peaked and settled over a healthy $18 billion primarily on the back of over $400 million multilateral loans from the World Bank and the Asian Development Bank.
This high growth in reserves can be attributed to the International Monetary Fund’s standby loan facility of $11 billion provided to the country back in fiscal 2009 followed by five tranches cumulating to slightly over $7 billion, according to an InvestCap research note.
Excluding the IMF’s money, the core reserve levels of the country stands at around $11 billion, not even catching up with the core reserve levels, which were last seen in fiscal 2005 at $12.6 billion.
The forex reserves of the country grew seven per cent yearly since fiscal 2006 but this surged to 18% in the last three years.
Improving forex reserves level not only plays a supporting role when the local currency becomes prone to an unexpected fall amid more outflows with consistently high double-digit inflation, but also satisfies rising import demand when prices of the essential commodities, mainly oil and food, are headed northwards, the note adds.
The outgoing year trend
Pakistan’s forex reserves rose nine per cent to $17.5 billion in fiscal 2011 amid massive rise in country’s exports due to record cotton prices and all-time high remittances of over $11 billion.
Resultantly, the rupee depreciated against the dollar by just 0.5 per cent during fiscal 2011 against the average depreciation of seven per cent in the last five fiscal years.
As a result, the current account of the country turned into surplus after a span of seven years of consistently being in the deficit.
Will this affect the next monetary policy?
As far as the monetary policy decision of the State Bank of Pakistan is concerned, it depends on a number of factors including government borrowing and inflation being the primary ones, adds the note.
Government borrowing from the central bank stood at a relatively manageable level of Rs167 billion above the defined ceiling of Rs1.2 trillion, while inflation stood at 13.9 per cent in FY11. This calls for a favourable monetary policy in the second quarter of fiscal 2012 onwards keeping current scenario in perspective.
Published in The Express Tribune, July 9th, 2011.
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In my humble opinion, the government should sit down with the IMF and explain to them issues that need to be sorted out on the highest priority basis: circular debt in the energy sector and bringing in improvements in the same sector. Between 4 and 5 billion are needed to have a clean slate from CD and bring basic improvements in the energy sector. We are still going to be with $13-$14 billion, which are above the amount IMF has lent us and be kept as security.
A "favorable" monetary policy?
What does that mean?
With broad money growing at 14%, do you expect the SBP to CUT the policy rate and make everyone happy?
Also do not forget, a rise in reserves injects more money into the economy -- unless "sterlized".
That is the last thing we need given the present rate of inflation.