Unsustainable equation: Ministry paints rosy picture of foreign currency reserves

Expects reserves to drop only $1.5 billion next year with $2 billion in assistance from ‘friends’.

ISLAMABAD:

The Ministry of Finance is projecting a drop of just $1.5 billion in foreign currency reserves of the State Bank of Pakistan in the next financial year based on the premise that the country will receive a cushion of $2 billion from ‘friendly countries’.

The assumption that the reserves will fall $1.49 billion, to be precise, comes amid a ‘distant’ hope that Saudi Arabia will offer $1 billion in the shape of oil supply on credit and the United Arab Emirates and China will give $1 billion in cash ($500 million each) in the fiscal year 2013-14, sources in the finance ministry say. The Chinese assistance will come under the currency swap arrangement.

Analysts, however, say that creating a breathing space by building reserves with the help of other countries seems unsustainable and a traditional way of running the economy. They suggest that for the revival of the economy the country should be put on a painful path of reforms that the International Monetary Fund will prescribe for any future bailout package.

In addition to paying back the debt to bilateral and multilateral creditors, Pakistan will have to return around $3.5 billion to the IMF next year.

The projection for next year is also not commensurate with the trend in the past couple of years. In the last two fiscal years, SBP’s reserves dropped by over $9.5 billion.

In fiscal year 2011-12, central bank’s reserves declined $4.5 billion whereas for the current fiscal year estimates suggest a fall of $5.1 billion and in the first 10 months reserves have already come down by almost $4 billion.

However, the SBP has got a trade financing facility to shore up reserves that stood at $6.56 billion on May 24. By June 30, net reserves held by the central bank may come down to $5.8 billion, say ministry sources.

Following the projected decline of $1.5 billion next year, the reserves will drop to a level that will meet only one-month import bill.

An IMF team is arriving in Pakistan on June 19 to critically review the country’s balance of payments and fiscal position and chances are there that a fresh bailout programme may also be negotiated. The final decision rests with the political leadership whether to go for an IMF programme or not.

In the absence of a backup arrangement, sources say, the rupee may shed value against the US dollar at a faster pace than expected.

The $1.5 billion decline also looks unrealistic when seen in the context of projection for foreign remittances next year. According to sources, budget makers expect remittances to reach $14.94 billion, an increase of 6.5% or $912 million over the current year’s forecast of $14.1 billion.

In first 10 months of this year, remittances grew by $693 million or 6.3% to $11.6 billion, slowing down from the growth in the past three years when they grew in double digits.

Rerouting of illegal money earned in Pakistan through foreign remittances is said to be a factor behind the phenomenal increase in the previous three years.

Despite that, the healthy growth in remittances provided cushion at a time when foreign assistance had dropped significantly due to previous government’s failure to introduce critical tax and energy reforms.

Sources stress that remittances have already reached saturation point and one of the reasons that planners see a low growth is repatriation of thousands of Pakistanis from Gulf countries.

Pakistan Remittance Initiative – a government programme aimed at facilitating and encouraging a speedy flow of remittances – has also hit snags because of delay in disbursement of promised rewards as well as corruption that has led to a crackdown by the FIA.

Published in The Express Tribune, June 7^th, 2013.

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