The State Bank of Pakistan has bought over $2 billion from the interbank market in the past seven months aimed at retaining official foreign exchange reserves at their current levels and also offsetting the impact of low disbursements of foreign loans.
The purchases from the market have also helped achieve the targets set by the International Monetary Fund regarding the net international reserves (NIR) requirements and the forward swaps, according to the sources in the central bank.
Despite major buying from the market, the rupee-dollar parity largely remained stable with the local currency strengthening to around Rs279 to a dollar.
The central bank avoids responding to questions about the sale and purchase of foreign currency.
The sources said that the major purchases were made during the past few months, which have offset the impact of the shrinking window of external borrowings. Had these purchases not been made, the foreign currency reserves would have slipped to below $6 billion, and the rupee started depreciating, said the central bank sources.
The sources said that the SBP has met the IMF target of lowering the forward swap position to $3.45 billion by the end of December. These short-term borrowings by the central bank remained at $3.42 billion, slightly better than the IMF’s maximum ceiling for the first half, the sources added.
They said that the central bank was also comfortable against another IMF target of NIR. The global lender has set the condition that the government’s net reserves should not be negative by more than $13.4 billion in the first half of the fiscal year.
The IMF’s projection of keeping the gross official foreign exchange reserves to $8.2 billion by the end of December has also been met. The reserves remained at $8.3 billion by end-December.
All this was possible mainly because of buying the dollars from the market, as the federal government struggled to materialise the planned foreign loans inflows.
During the first half of Pakistan, the federal government repaid $3.2 billion foreign debt and also secured the rollovers of another $4 billion from Saudi Arabia and China. Despite these payments, Pakistan’s external debt and liabilities again increased to $131.2 billion by end-December, according to the central bank data.
Pakistan is now trying to secure a rollover of $2 billion Chinese debt maturing on March 23rd. The country’s current reserves position does not support making these payments, and there is no option but to get the loans rolled over again.
Three weeks ago, Prime Minister Anwaarul Haq Kakar wrote a letter to Li Qiang, the Chinese premier, requesting him to rollover the debt, according to the finance ministry officials. Pakistan is paying a 7.1% interest rate on this $2 billion Chinese loan.
Read IMF loan uncertainty very high
Another loan payment of $1 billion on account of Eurobond is maturing in mid-April that cannot be rolled over.
The IMF has assumed the average exchange rate at Rs300 to a dollar by June – an assumption that is unlikely to be true if the central bank keeps buying the dollars from the market to cushion the reserves.
The IMF said earlier that the wedge between the interbank and open market exchange rates has narrowed, and the money markets have adequate liquidity. Reforms of exchange companies introduced in early September, coupled with measures against illegal foreign exchange activities, also helped improve market sentiments and liquidity, according to the IMF report.
The last IMF report had also stated that on the back of disbursements by the international financial institutions and continued SBP purchases, gross reserves further increased. However, despite the relative increase in the level of the foreign exchange reserves, the cushion was hardly sufficient to back 1.4 months of imports.
During the first seven months of the fiscal year, the country had booked a trade deficit of $19.6 billion on the back of a 14% reduction in imports. The imports during this period remained at $36 billion as against $16.5 billion of exports.
Since June 2019, Pakistan has adopted a market-based flexible exchange rate system, where the exchange rate is determined by market demand and supply conditions. But there have been incidents since June 2019 when the central bank also pumped dollars to stabilise the exchange rate during the period of uncertainty.
The higher purchases and meeting the external sector-related targets may help completion of the next programme review that carries the bonanza of the $1.2 billion loan tranche. However, the IMF is keen to negotiate the last tranche with an elected government.
An early formation of the government and timely announcement of the new finance minister would help secure the date for the next review talks from the IMF.
The finance ministry has not been able to ensure inflows of $6 billion on account of Eurobonds and foreign commercial loans. The data reported by the Economic Affairs Division and the central bank showed that Pakistan secured $8.1 billion in foreign loans during the first six months of the fiscal year, which was equal to one-third of the downward revised annual requirements.
Pakistan has also secured $5 billion rollovers from Saudi Arabia and the United Arab Emirates, taking total external sector inflows to $13.1 billion or 52% of its needs.
Published in The Express Tribune, February 17th, 2024.
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