SBP purchases $27b in 3.5 years

State Bank of Pakistan (SBP) Governor Jameel Ahmad said on Wednesday that the central bank bought $27 billion from the local market in three and a half years to build foreign exchange reserves, underscoring growing dependence on these purchases in the absence of an increase in exports.

Briefing the National Assembly Standing Committee on Finance, the central bank governor also said the economy was projected to grow much over 4% in the third quarter of this fiscal year.

Since January 2023, the central bank has bought $27 billion from the open market, including $4.5 billion in this fiscal year, said Ahmad. The figure is about $3 billion higher than the amount disclosed by the governor less than two months ago.

"Our reserves are increasing every week despite making $5 billion debt repayments in April and will soon cross $17 billion," said the governor.

Ahmad and Finance Minister Muhammad Aurangzeb briefed the committee on the current state of the economy and implementation of the targets set by the International Monetary Fund (IMF). However, Committee Chairman Syed Naveed Qamar did not allow MNA Jawed Hanif to ask a question about the interest rate on the $3 billion new debt that Pakistan took from Saudi Arabia to repay a $3.5 billion debt to the United Arab Emirates.

Unlike in the past when IMF programmes would largely meet Pakistan's financing needs, this time the country is heavily dependent on bilateral lenders and market purchases to build reserves. The massive market purchases have also weakened the rupee, which otherwise would have been stronger due to the availability of $27 billion in the market. The heavy reliance on market purchases also shows the failure of the IMF programme, which has not helped attract sufficient non?debt?creating inflows to build foreign exchange reserves.

The central bank has about $16 billion in reserves, including $12 billion in cash deposits from Saudi Arabia and China. Pakistan's reserves are largely built on the back of foreign loans. Aurangzeb informed the committee that Pakistan on Wednesday received the final regulatory approval from China, which was required before floating Panda bonds to raise $250 million in debt.

"We are going to issue $250 million worth of Panda bonds in the next 10 days," the finance minister announced. He had earlier tried to float the bonds in December last year. To bridge the gap, the government has already raised $750 million in debt from Standard Chartered Bank as a private placement against Eurobonds.

The governor said economic growth has picked up and the economy was estimated to grow much more than 4% in the third quarter (January-March) of this fiscal year. He acknowledged that the Middle East conflict will have some implications for growth, but the annual growth rate will still be higher than 3.1% of the last fiscal year.

MNA Hanif questioned the rationale behind raising the interest rate to contain inflation driven by oil supply shocks. Ahmad said energy prices were driving inflation while core inflation was also increasing. "Keeping in mind the 6-8% inflation path, the monetary policy committee took a prudent decision," he said, defending the move. The annual inflation rate increased to 10.9% in April due to global supply shocks and the government's decision to pass on taxes and global prices to domestic consumers.

Pakistan on track

Aurangzeb said that despite the Middle East conflict, the government was on track to meet its primary budget surplus and budget deficit targets. The minister said the oil import bill increased by over $1 billion last month because of the war, though that amount is still half the figure announced by Prime Minister Shehbaz Sharif, who said last week that the weekly oil import bill had grown from $300 million to $800 million.

"Our exports grew in April on a monthly and yearly basis, and there was also an increase in remittances," said the finance minister. According to the Pakistan Bureau of Statistics, exports fell by $1.7 billion to just $25.2 billion during the July-April period of this fiscal year, even though they grew on an annual basis.

Aurangzeb said the Middle East conflict had not affected Pakistan's external account, and even if the war continues during May-June, the country is on track to achieve this fiscal year's current account deficit target. "There is a need to gear up, because exports are not growing," said committee chairman Qamar. Responding to a question, the finance minister said Pakistan will have to look for sustainable economic growth.