The alarming decrease in foreign exchange reserves is indicative of Pakistan’s widening current account deficit, which increased to $1.3 billion in the first four months of fiscal 2014 (July-October).
Foreign exchange reserves held by the State Bank of Pakistan (SBP) decreased to $3.4 billion, hitting its lowest level since November 2001 when they had been less than $3.5 billion, according to data released yesterday.
Total liquid foreign reserves held by Pakistan on November 22 amounted to $8.7 billion, the SBP data revealed. Out of the total liquid reserves, net foreign exchange reserves held by banks other than the SBP amounted to $5.3 billion.
Speaking to The Express Tribune, economist Sayem Ali said the sharp decline in foreign exchange reserves was due to the hefty oil import payments and external debt repayments, despite the country registering record remittances and a strong growth in exports.
“Aggressive monetary tightening, higher import duties and cash margins on imports would have eased the pressure on foreign exchange reserves,” said Ali. “However, the government has so far not shown any urgency to arrest the decline in reserves.”
The alarming decrease in foreign exchange reserves is indicative of Pakistan’s widening current account deficit, which increased to $1.3 billion in the first four months of fiscal 2014 (July-October), a stark comparison to the surplus of $14 million in the corresponding period last fiscal year.
As a consequence, Ali said, the Pakistan rupee is witnessing a sharp depreciation. The rupee traded at Rs108.55 a dollar on Thursday, which translates to a depreciation of 10.2% since June when one dollar was worth Rs98.50.
“The IMF agreement was expected to avert a balance of payment crisis. But unfortunately, the upfront disbursement was only $550 million as opposed to nearly $3 billion upfront disbursement in the case of the 2008 loan. Hence, foreign exchange reserves have continued to decline despite the IMF loan agreement,” he added.
Pakistan has still not received the second tranche of the current IMF loan, which will be equal to $544 million.
Notably, the SBP-held foreign exchange reserves, which cover less than one month of imports, do not include the $396 million repayment that the country made under the IMF/SBA facility on November 26. Ali estimated that the SBP reserves would decrease to $3 billion by the end of November.
“This is a critical level and, unless the trend is reversed, the rupee will continue to devalue and the cost of borrowing – such as LCs on imports, Eurobond, trade finance – will keep rising, thus hurting businesses.”
Meanwhile, according to Global Securities analyst Umair Naseer, the least the government can do now is to speed up the process of the 3G auction licence and the privatisation of public-sector enterprises to realise inflows of foreign exchange.
“There appears to be no short-term solutions to the problem,” said Naseer, adding that other major sources of foreign exchange reserves include foreign direct investment, exports and remittances, which require macroeconomic stability and implementation of long-term policy initiatives.
He said relations with the United States will also play an important role in determining the level of foreign exchange reserves in the coming months, as Pakistan can receive Coalition Support Fund payments of roughly $1 billion in the current fiscal year.
“I believe short-term reserves will remain under pressure, but the situation may improve in the fourth quarter (April-June) of fiscal year 2014,” Naseer added.
Published in The Express Tribune, November 29th, 2013.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
COMMENTS (34)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ
Meanwhile, Nawaz Sharif is focused on bullet train, laptops and luxury buses
@truthbetold: A well penned exposure of Musharraf's misspending billions of dollars of aid received on nuclear toys and other military infrastructure which could have been better spent in improving Pakistan's economy. Had Musharraf spent this massive aid received during his nine years tenure on electric power enhancement, manufacturing units, education, railways and roads, Pakistan should have been a progressive state not dependant on foreign aid.
The feudals and aristocrats who support Nawaz Sharif and his autocratic government will continue to sing his praises, living in denial while Rome burns.
truthbetold: Well said.Not to forget during nineties Pakistan was under US sanctions and no dollars were coming but that was the era when NS laid foundation of modern Pakistan.It was Musharaff's luck that war on terrorism lift all sanctions and payment of debt were resheduled alonmg with massive amount of dollars pouring in.What were Musharaf achievements other than more terrorism and no big project of national significance.Yes he gave more freedom to mullah and media but just to maligne politicians and weaken democracy in Pakistan.Now lotas of general are in deep frustrations and trying hard to derail democracy once more.Magr ab wo general kahan.
@Malik Hamza:
"Welcome Nawaz Sharif’s Government . It was Musharraf era when Foreign Exchanges reserves grew in Sharif’s era it is decreasing."
Musharraff and Shaukat Aziz used smoke and mirror and cooked the books to make it appear that Pakistan was financially well-off and that the GDP was growing. Also, don't forget that during Mush's time, Pakistan received over $20B in aid from the US and other donor countries.
What you have been witnessing for the past five years is the after effect of Musharraf's bad economic policies. Instead of using the $20+ Billions received to get the economy growing, Mush spent it on missiles, fighter jets, radars, ships, submarines and more nuclear bombs. Mind you Pakistan spends about $3B a year on nuclear bombs alone. Musharraf even spent the $3+ Billions received for 2005 earthquake victims and the floods on radars and fighter jets.
What you witness today is the manifestation of the "we will eat grass to get nuclear bombs and bleed India through 1000 cuts in a 1000 year war" paradigm in effect since 1971.
We miss Musharraf.
It's total distrust by the people of Pakistan on Nawaz Sharif,Pakistani's have billions but they are taking their money away. Recall Musharraf era when Dollars were flowing to Pakistan,every one Pakistani or foreigner were trusting on Musharraf.
Why are you so worried about? America the great will always give green signal to IMF to give dollars to pakistan to be enjoyed by the elites till the day we remain there slaves
He said relations with the United States will also play an important role in determining the level of foreign exchange reserves in the coming months, as Pakistan can receive Coalition Support Fund payments of roughly $1 billion in the current fiscal year
But then you are blocking the NATO supply route, The last time you blocked the route post Salala, the CSF payments, US delayed the CSF payments
And no, Imran Khan and PTI are not non state actors
@DAJ Like his hue and cry about engineered default in 1999, whereas the likely default situation was created by his ill conceived fiscal and monetary policies.
Things should only improve from here as some large US$ inflows are expected Dec onwards. However these will only provide a very temporary relief to the depreciating PKR /US$ exchange rate. Until strong measure to control pilferage and corruption are not taken at the top level things can only go down. Measures including stopping power line losses, reducing subsidy on power, stopping gas to the CNG sector, improving law and order, especially in Karachi and KPK and privatization of government entities which are a burden on exchequer we will not go any place.
Last time when he left office, reserves were as low as $300 Million. Thanks to Musharraf who put the economy on track and took the reserves to all time high with annual growth at 7,5%. But than the ides of November destroyed every thing when Lawyers movement resulted in destabilization of the State and economy. Chaudhry proved to be the collective wrong of the Nation.
Hurray, our foreign reserve are much ahead than pakistan
The country is now bearing the heat of excessive borrowing of USD16 Billion by the PPP regime and simultaneously keeping the value of PKR artificially inflated vis-a-vis USD & EUR. Even the dictator Musharraf had kept the PKR artificially inflated (overvalued) during the last 1.5 years of his Government because of the the elections year.
Mentally NS is stuck in the 90s era. Now thanks to his ineptness Pakistan is being dragged backwards as well.
since Pakistanis compare India on every aspect- let me compare here India's Forex reserve. India has 283 Billion $ Forex reserves. It is roughly 80 times more than Pakistan's, given we are only 5 times bigger than Pakistan in Population.
Don't worry Ishaq Dar will take care of everything
There is truth in the guns or butter proposition. Until Pakistan accepts the reality that there can be no parity with India and accepts its inferior position vis a vis India by scaling back her outsized military ambitions, it is inevitable that Pakistan will lurch from one crisis to another. Attempt of Pakistan to box above its weight class is not a consequence free option as some in Pakistan would like to believe.
Fool me once shame on you fool me twice shame on me.
NO. It was not terror money, earthquake money or flood money during Musharraf rule. It was real economic progress and trust which produced enough funds.
@Ishrat salim: ''very soon the people will embark on civil revolution due to persistant económic woes……" Civil revolution (tsunami) is dying slowely on GT road.Now is time for namaz janaza for tsunami and saying azan to new born (Asian tiger).Period.
@Malik Hamza,
That was war on terror money, earthquake money and flood money.
Once again under a nawaz sharif government the country is heading towards economic disaster with a devalued rupee and low reserves. There are external and internal threats. Do you remember seeing this movie before? It's just like 1999 when nawaz sharif seized all private bank dollars and then there was economic chaos leading to the coup which brought pervez Musharraf to pakistan. For pakistan, democracy is code word for aristocratic and feudal dictatorship. The country is rapidly heading towards economic disaster. All the good that Musharraf had done has been destroyed over the last 6 years.
It’s a very dangerous omen. There is lack of trust. Nawaz govt. failed to win the hearts of masses.
shame on pakistan ..........
Two payments to IMF done and a tranche expected now + spectrum auction in 1st quarter expected to fetch $1-$1.2 Billion. Things will stabilize soon.
Great Going PMLN government..in election campaign they were beating there chests and were shouting all the way that they have the experience and experience politicians to take Pakistan out of the troubles...hats off to the experience which has gained new lows for the country...they even don't have enough competent people to fill out the important ministries..shabaaaash sheraaaaaaaa....
The elite will continue to enjoy until the country is destroyed. After which they will fled. PMLN refuses to tax the rich and feudals because they are part of the problem. The parliament is a joke, a debating club. Pakistan need a revolution to survive.
Post 1998-99 PML N scenario....keep it up ! Insha Allah the nation is waiting for your call once again...."dóllar bhego mulk bachao ".but this time you will not receive same response, you can fool people once, not every time....very soon the people will embark on civil revolution due to persistant económic woes......
Welcome Nawaz Sharif's Government . It was Musharraf era when Foreign Exchanges reserves grew in Sharif's era it is decreasing. Shock much ?