SBP purchases record $722m in July

Absorbs excess dollar inflows to strengthen forex reserves, repay foreign debt

KARACHI:

The State Bank of Pakistan (SBP) reported Friday it had purchased US dollars worth a record net $722 million from local currency markets in July 2024, absorbing the surplus supply of the greenback from the domestic economy to repay foreign debt and bolster the country's foreign exchange reserves.

This announcement coincided with the domestic currency appreciating by Rs0.15 to Rs277.70 against the dollar, ending a four-day losing streak on Friday.

The central bank has now officially reported foreign currency purchases for the second consecutive month under its recent commitment to disclose interventions in the foreign exchange markets, which it does by buying and/or selling US dollars in the market. Earlier, the SBP announced it would release intervention data monthly with a three-month lag.

In June 2024, the central bank bought a net $573 million from the local currency markets, Topline Securities reported, citing central bank data. The brokerage firm's CEO, Muhammad Sohail, commented that the central bank made these purchases over the past two months from the inter-bank market to support its foreign exchange reserves.

"With higher US dollar inflows, this is a prudent approach to increase the liquidity in foreign exchange reserves and to stabilise the rupee's value," Sohail stated.

Previously, The Express Tribune reported that the central bank had bought around $6 billion from local foreign exchange markets during the previous fiscal year (FY24), ending June 30, 2024. Most of the dollar purchases were utilised for the timely repayment of maturing foreign debt and to stabilise the country's foreign exchange reserves over the year.

SBP Governor Jameel Ahmad has reiterated in recent statements that there is ample foreign currency supply in the domestic foreign exchange markets, thanks to robust inflows of workers' remittances sent home by overseas Pakistanis and improved export earnings over the past several months.

The significantly higher supply of the greenback, compared to its demand for imports, has continued to create a net surplus of foreign currency in the market. The central bank is purchasing this surplus to meet maturing foreign debt obligations and bolster the country's foreign exchange reserves.

Notably, the country received a record-high quarterly workers' remittance of $8.8 billion in the first quarter (Jul-Sep) of FY25, up 39% from the same quarter last year (FY24). In addition, export earnings rose by 8% to $7.4 billion over the same period.

The dollar supply in the inter-bank market is expected to remain in surplus, providing ongoing support for the central bank's advance purchases of the greenback. The government and central bank have jointly devised a strategy to limit imports to levels at or below the inflows from workers' remittances and export earnings. This strategy primarily aims to maintain the current account deficit (CAD) at a breakeven level and boost foreign exchange reserves to $13 billion by the end of the current fiscal year on June 30, 2024.

The strategy has already contributed to an increase in foreign exchange reserves (held by SBP) by slightly over $2 billion in the past three and a half months, reaching $11.15 billion from around $9 billion fourteen weeks ago.

Of this $2 billion increase, nearly half came from the International Monetary Fund (IMF)'s first loan tranche of $1.03 billion in late September 2024, with the remainder covered by remittances and export earnings.

Both current and former SBP chiefs have reported that the central bank also injects US dollars into the inter-bank market when extraordinary pressure on the rupee emerges against the US dollar, aiming to stabilise the exchange rate.

The rupee had declined by a cumulative Rs0.21/$ over the prior four consecutive working days after exporters slowed their dollar sales on the futures counter in the forex market. However, the latest weekly increase of $116 million in SBP's foreign exchange reserves, ending October 25, 2024, appeared to ease pressure on the rupee, contributing to its appreciation on Friday.

The Exchange Companies Association of Pakistan (ECAP) reported that the local currency gained Rs0.15 day-to-day, closing at Rs278.63/$ in the open market.

UBL offers merger with Silkbank

In a notification to the Pakistan Stock Exchange (PSX) on Friday, United Bank Limited (UBL) disclosed that it has submitted an offer to Silkbank Limited for amalgamation. UBL proposed issuing new ordinary shares to Silkbank shareholders at a ratio of one new UBL share for every 325 Silkbank shares. The offer and proposed merger are contingent on approvals from UBL's board of directors and shareholders, as well as the execution of definitive transaction documents between the two banks. The merger also requires regulatory, corporate, and third-party consents and approvals.