Foreign currency: Reserves rise to $3.4 billion on inflows from institutions

Rupee, reserves will be under pressure as debt repayments continue.

KARACHI: After dropping to a 12-year low of $2.9 billion on December 6, foreign exchange reserves held by the State Bank of Pakistan (SBP) increased by $505 million to $3.4 billion a week later, according to the latest data released by the SBP on Thursday.

The 17% hike in the central bank’s foreign exchange reserves is mainly on the back of inflows amounting to $430 million from multilateral and bilateral sources. Pakistan received $144 million from the United Kingdom’s Department for International Development, $137 million from the Islamic Development Bank and $149 million from other multilateral institutions, according to an SBP spokesman.

Total liquid foreign reserves, including those held by banks other than the SBP, were $8.5 billion on December 13.

Speaking to The Express Tribune, Standard Capital Securities Head of Research Syed Faisal Shaji said lasting stability in the SBP-held foreign exchange reserves position can only be achieved through an improvement in the real economy.



“We believe industrial growth is the key to sustainable (foreign exchange) inflows. The government should encourage foreign direct investment (FDI), which is extremely low in Pakistan compared to regional countries,” Shaji said.

Pakistan received FDI worth $330.7 million in the July-November period, which is 4.7% higher than $315.8 million it received in the corresponding period of previous fiscal year.

Foreign exchange reserves will remain under pressure because the country is going to continue repaying IMF instalments out of its reserves which, Shaji says, is not a sound approach.

The SBP has made payments of $100 million from its foreign exchange reserves during the week ended December 13 on account of external debt servicing and other official payments, according to the SBP spokesman.

“Immediate privatisation of government holdings in banks could settle revenue streams for the time being. I fail to understand why the government is delaying privatisation,” Shaji noted.

The current level of foreign exchange reserves only covers less than one month of imports, although reserves should ideally be able to cover up to five months of imports.

Expecting a further drop in the value of the rupee against the dollar, many exporters are reluctant to repatriate their export proceeds within the stipulated period of 180 days.

Shaji says the finance minister should bring necessary changes in the foreign exchange manual to prevent such practices, which have brought the rupee under avoidable pressure.

According to Global Securities research analyst Umair Naseer, the SBP-held reserves and the rupee are likely to stabilise in the short term. Disbursement of the second tranche of the IMF’s Extended Fund Facility amounting to $550 million is expected in coming days, which is likely to support the reserves in the near term at least.

However, the absence of major inflows will keep the rupee-dollar parity under pressure in the second half of fiscal year 2013-14, he says.

“We estimate that the rupee and reserves will stabilise in the fourth quarter of 2013-14. Our June 2014 estimate of the rupee-dollar parity is Rs109,” Naseer added.

Published in The Express Tribune, December 20^th, 2013.

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