SBP buys record $9 billion to stabilise reserves

Senate standing committee on finance questions inflation impact, undervalued rupee, and external debt management

Listen to article

ISLAMABAD:

Pakistan's central bank purchased a record over $9 billion from the local market in the past year to stabilise foreign exchange reserves—a staggering amount that has helped the country remain afloat despite low inflows of foreign loans.

During the calendar year 2024, the central bank purchased over $9 billion, said Jameel Ahmad, Governor of the State Bank of Pakistan, while speaking to The Express Tribune after a meeting of the Senate Standing Committee on Finance. Of the $9 billion, over $4.5 billion was bought between July and December 2024, said the governor.

Ahmad further stated that Pakistan has also requested the United Arab Emirates (UAE) to roll over $2 billion in cash deposit debt, maturing between January 17 and 21. He added that the UAE has already committed to the International Monetary Fund (IMF) to roll over the loans as part of the Extended Fund Facility deal.

In return for 40 strict conditions, the IMF provided a $7 billion loan package to Pakistan, with disbursements linked to biannual reviews. However, the amount purchased by the central bank between January and December 2024 was significantly higher than the total IMF package. The IMF loan comes at nearly 5% interest in dollar terms, and the country's economic policies remain subject to the Bretton Woods System organisations—the World Bank and IMF.

About Rs2.5 trillion was utilised at the current rupee-dollar parity to purchase the $9 billion during 2024. However, it remains unclear at what rate the central bank made these purchases to stabilise foreign exchange reserves.

While the intervention has kept forex reserves stable at $11.7 billion despite heavy debt repayments, it has also contributed to keeping the rupee undervalued at Rs278 to a dollar.

Ashfaq Yousaf Tola, a chartered accountant and former chairman of the Revenue and Resource Mobilisation Commission, stated that due to the central bank's purchases, the rupee is undervalued by Rs40-45 to a dollar, leading to inflation of at least 5%. However, without these purchases, reserves would have dropped below $3 billion, resulting in even higher inflation.

Unlike in the past, the $11.7 billion in reserves is of higher quality as they are based on market purchases, said Ahmad during the standing committee meeting. Pakistan Tehreek-e-Insaf (PTI)'s Leader of the Opposition in the upper house of Parliament, Senator Shibli Faraz, questioned the quality of the reserves. The SBP governor said the purchases have prevented Pakistan's external public debt from rising above $101 billion by the end of December. The country's total external debt reached $133 billion by December 2024. Without these purchases, external public debt would have grown further, he added.

Senator Saleem Mandviwalla, the committee chairman, argued that the rupee could appreciate if the central bank stopped buying dollars from the market. However, the governor countered that the purchases, made towards the end of daily trading, did not affect market prices. The central bank creates a dollar surplus by limiting the value of imports and buying dollars from commercial banks.

"The dollar supply is higher than the demand in the market, therefore, the exchange rate was stable," said Ahmad.

Ahmad noted that market purchases helped maintain reserves at around $12 billion despite $5.7 billion in debt repayments during the first half of the fiscal year. Pakistan is set to make $4.6 billion in additional repayments during the second half, with the remaining amount expected to be rolled over. He further stated that bilateral and commercial creditors are likely to roll over $16 billion in debt, including $2 billion from the UAE maturing this month.

Offshore payments under scrutiny

The committee chairman revealed that Pakistani banks are making payments to Visa and MasterCard companies for transactions conducted locally and in local currency. These payments are recouped through annual fees charged to credit and debit card users.

Visa and MasterCard receive a percentage of every transaction made through local merchants or online purchases, disclosed Mandviwalla.

The executive director of the State Bank of Pakistan (SBP) confirmed that these digital payment providers earned about $277 million in fees from 287 million transactions last year.

Mandviwalla urged the SBP to either halt these payments on local transactions or face legislation from Parliament to stop the outward flow of dollars. He also called for regulations to introduce separate debt and credit cards for local and international transactions.

Of the 44 million debit and credit cards in Pakistan, only about 11 million are local, while the rest are owned by Visa and MasterCard, the executive director revealed. The standing committee also demanded a detailed briefing on the Pakistan Remittance Initiative after reports indicated that 80% of the Rs86 billion allocated for promoting remittances is being used for overseas incentives.

The SBP executive director confirmed that most of the initiative's budgeted subsidies are flowing abroad.