Liquidity crunch: Drain on SBP’s reserves dents forex reserves

Increased imports and IMF bailout haemorrhage currency reserves.

KARACHI:

Pakistan’s total liquid foreign exchange reserves decreased to $10.2 billion, down 7.2% from the end-of-June figure of $11 billion, according to date released by the State Bank of Pakistan on Thursday.

The country’s total liquid assets have dropped over 44% since July 2011.

The decline of almost $800 million in Pakistan’s foreign exchange over the month of July 2013 is almost entirely contributed by the decline in State Bank’s foreign exchange reserves. By the end of July, the State Bank held $5.1 billion, or 50.5% of total liquid foreign reserves. The central bank’s foreign reserves stood at $6 billion at the end of June, which means a decrease of 13.9% in a month.



Speaking to The Express Tribune, Vice President Elixir Securities Muhammad Azfer Naseem said the repayment of approximately $110 million to the International Monetary Fund (IMF) is one of the factors for the decline in reserves. “However, the main reason seems to be higher imports (in July),” he added.

Pakistan is expected to receive around $7.3 billion soon from the International Monetary Fund (IMF) to consolidate its balance of payments position. The last stand-by agreement (SBA) of $11 billion that Pakistan signed with the IMF fell apart in just three years with only $7.4 billion having been disbursed. The government is likely to seek a longer-dated repayment schedule this time around to allow it some time to consolidate its finances, according to The Economist Intelligence Unit (EIU), an independent provider of global economic forecasts.



“The government began repaying the previous SBA in 2012 and the front-loaded repayment schedule -- with principal repayments expected to total $3.3 billion in 2013 and $2 billion in 2014-15 -- has also taken a toll on the public finances,” a recent EIU analysis said.

As for the net foreign reserves held by the banks, excluding the State Bank, the latest figure of $5 billion shows a slight month-on-month increase of 0.8%.

Earlier in the week, Pakistan banned the import of gold for a 30-day period. The decision was based on reports that imported gold was being smuggled into India from Pakistan which -- according to Naseem - has also contributed to the decline in foreign exchange reserves.

In the first half of calendar year 2013, gold worth Rs92.9 billion was imported into Pakistan, which is almost 386% higher than the value of gold imported in the corresponding period of 2012.

But Naseem says he expects Pakistan’s foreign exchange reserves will start recovering once the country gets the IMF loan. “This will also pave the way for inflows from multilaterals, such as the World Bank and Asian Development Bank, which will also support the level of reserves,” he said.

Published in The Express Tribune, August 2^nd, 2013.

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