Analytical independence: SBP, finance ministry differ on forex reserve depletion
The State Bank of Pakistan has questioned the federal government’s projections of a marginal decrease in foreign currency reserves, fearing it could fall to as low as $12 billion by June as gap between external payments and receipts balloons to $2.1 billion over the next five months.
Sources in the central bank told The Express Tribune that the current account deficit – the gap between external payments and receipts – will be almost double than what the federal government claims and there will be dip in exports instead of any growth.
The estimates of $6 billion decrease in foreign currency reserves are based on what are considered more realistic assumptions: that Pakistan may be able to get only one-third of the estimated Coalition Support Fund from the United States, for instance.
Similarly, the country may not be able to recover the outstanding $800 million from Etisalat – the Dubai based telecom giant – that owes that amount to the government for its $2.6 billion purchase of Pakistan Telecommunications Company. In addition, the government will likely be unable to issue a $500 million bond against the backdrop of the European debt crisis.
At the start of the fiscal year the total reserves stood over $18 billion that have already slipped to $16.7 billion. The finance ministry says the reserves would remain at $16.8 billion by June 30, 2012 while the SBP figure is $12 billion, the sources said.
The anticipated current account deficit and decrease in reserves is likely to bring rupee under pressure that may lose value against the US dollar, said the sources.
The sources added that during Article-IV consultations with the International Monetary Fund held in November, the central bank told the Washington-based lender that reserves may fall to below $12 billion and liquid reserves may even slip to less than $10 billion.
The sources said that the Finance Ministry did share its so called “forward looking analysis” with the SBP that projected only a $1.2 billion decrease in reserves. The central bank did not agree with the findings of the analysis, they added.
Rana Assad Amin, the finance ministry spokesman who also happens to be special finance secretary, was not available for comment.
According to the SBP, from July through November, the current account deficit was $2.1 billion – four times higher than in the same period last year. The finance ministry has projected that it would be $2.7 billion but the SBP has a different set of numbers, said the sources.
They added that the gap between external receipts and payments may widen to $4.5 to $5 billion by the end of fiscal year 2012 and that was a major worry for the central bank as it will have direct impact on reserves.
SBP spokesman Syed Wasimuddin neither confirmed nor denied his institution’s differences with the finance ministry. In a terse written response, he said “no comments”.
On the basis of the finance ministry’s forward looking analysis the following questions were asked to the SBP. Did the SBP agree with the findings of the forward looking analysis, the SBP’s projection of reserves depletion, the estimated current account deficit and projections for growth in imports and exports?
The sources said that the central bank also differed with the finance ministry’s projections of growth in exports and imports. They added against finance ministry’s projection of 5% growth in exports while the central bank assumes a 5% decline. The State Bank estimates for import growth are also much higher than the finance ministry’s 10-12%.
A senior finance ministry official said on the condition of anonymity that “presumably, the central bank’s analysis is based on the assumption of zero action on the part of the government and that every negative thing happens to us.” He said if external account is deteriorating more than the finance ministry’s projections then “we have to sit and see what needs to be done”.
He said the government was expecting that it would still get $800 million on account of the CSF and $400 million has already been processed. Moreover, efforts are being taken to recover money from Etisalat and issue licenses of third generation mobile phones.
Published in The Express Tribune, December 18th, 2011.
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@Meekal Ahmed: I wanted to comment on this article but you already have put across all of the points. Completely agree with you on every point.
@Cautious: Relations are no so bad after all. It is US's poverty than its hostility that hurts Pakistan more.
There are two other elephants in the room that no one seems to consider. If relations with the USA continue to spiral downhill it's possible that trade with your largest export partner will stop - it's also possible that the USA will impede remittances from Pakistani expatriates to Pakistan. With those critical sources of hard currency gone - how long before your reserves dry up?
Good points. There is perhaps almost always a divergence in views and projections of the MoF and the SBP. That is not a bad thing.
As far as I know, the MoF has no economist. I don't know who makes the projections. The SBP does have a good economic team.
As for the brilliant officer of the MoF who says that if things deteriorate further we would have to sit and think about it, he must be brain-dead. Does he think you can stop a build-up of adverse trends in its tracks? Hasen't he ever heard of the word "lags"?
Even if we adjust polities today, the impact will not show up for 8-12 months by which time it may be too late.