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.