SBP-held foreign exchange reserves are expected to reach $9-9.5 billion by the end of the current fiscal year. PHOTO: FILE
Massive inflows in the form of foreign loans are likely to push the country’s foreign exchange reserves to $17 billion by the end of 2014-15.
Currently, Pakistan’s foreign exchange reserves stand at $13.4 billion, which include reserves held by the central bank ($8.6 billion) and the banking sector ($4.8 billion).
According to a research note issued to its clients, KASB Securities believes foreign exchange reserves will increase by almost 27% by June 2015 based on the government’s projections for external loans, grants and repayment, and the estimated current account deficit of $2.1 billion in 2014-15.
While presenting the federal budget earlier this month, Finance Minister Ishaq Dar had said foreign exchange reserves would be more than $14 billion by the end of the outgoing fiscal year on June 30.
“Looking ahead, we believe an increase in the import cover is likely to lead the State Bank of Pakistan (SBP) becoming more inclined to cut the discount rate,” it said. Its expectation is understandable given that the SBP will likely be inclined towards monetary easing to spur economic growth with a relatively high level of foreign exchange reserves.
“At the same time, it reinforces our view of a relatively stable exchange rate outlook (2% depreciation per year) for 2014-15 and 2015-16,” it added.
SBP-held foreign exchange reserves are expected to reach $9-9.5 billion by the end of the fiscal year on the back of UBL privatisation proceeds ($311 million) and receipt of the fourth tranche of the IMF loan ($550 million) in June.
As opposed to net external inflows of $4.6 billion in 2013-14, the government has projected net external inflows of $5.4 billion in 2014-15. These include project loans ($1.8 billion), programme loans ($2 billion), IDB loans ($500 million), Eurobond ($500 million), Sukuk ($500 million), privatisation proceeds ($2 billion) and ‘others’ ($1.5 billion). After accounting for the repayments of about $3.4 billion, the projected net external inflows will amount to $5.4 billion.
“Despite ambitious projections on the external front, we believe the realisation of project/programme loans as well as a successful issue of Eurobonds and Sukuk bonds can boost foreign exchange reserves. Consequently, we maintain our view of relatively stable exchange rate in 2014-15 with an expected 2% depreciation,” KASB Securities said.
While the situation on the external front seems to be improving, money supply indicators suggest a significant shift in the government’s borrowing patterns, leading to enhanced private-sector credit off-take.
According to Elixir Securities, credit expansion in the government sector remained flat during the 11 months of the current fiscal year after having peaked in January. “Borrowing for deficit monetisation has now fallen to Rs63 billion, which is a drop of almost 93% since June 2013 (a decrease of 81% since January this year). Similarly, borrowings from the SBP also remained flat on an 11-month basis in the current fiscal year,” it said.
Analysts believe the government’s restraint in borrowing for budgetary support is one of the primary reasons for credit growth in the private sector. Reduced government borrowing will lead to a reduction in interest rates while stimulating private-sector lending at a faster pace,” Elixir Securities said.
Published in The Express Tribune, June 15th, 2014.
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COMMENTS (10)
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@optimist:
My comment was based on an example that was amplified on the basis of Dr Yakoob, whose article on increase in forex reserve was published as a rejoinder to last govt claim...you should have read my first comment before commenting...Trolls are so easy to spot !
@ Ishrat Salim If my life was so hard, I would not engage in Internet discussions and focus on finding over time. Trolls are so easy to spot!
@Bilal: This was one of the reason given by mr Yakoob ex governor of SBP also, bet u can challenge him too......
@Bilal: Well I've been doing some reading on what exactly FDI means. Turns out buying a foreign company's shares without taking part in their day to day operations, i.e. a passive investment, does not count as FDI. So JP Morgan or whatever buying UBL shares is not FDI.
@FK: Loans are not FDI. People will happily lend you money if you offer them a high enough interest rate. Consider that they were initially seeking 500 million but it got oversubscribed meaning they offered too high of an interest rate. It is no great achievement to misprice your bond sale.
@Bilal: UBL is a profitable company so of course there will be interest. But I bet we would have gotten much more if the security situation was better.
We need foreign investments in new companies. We definitely don't need more money coming into banks because our banks don't even lend to the private sector. All they do is borrow from depositors at exploitative rates and lend to the government.
@weary:
Read about UBL privatization, it has generated record breaking interest. And this "record breaking" term was used by Wall Street Journal, not some Pakistani newspaper. And mind you, this happened AFTER the Karachi attacks. FDI takes some time to trickle in. Just wait till end of this financial year, and we'll see huge and very positive changes in economic outlook.
@ishrat salim: You have no idea about finance, do you? The salary you send back home is spent in Saudi Rials? or Pakistani Rupees? So your remittances (and mine), while highly valuable to the economy, are NOT counted in the forex reserves of the country.
The majority of this forex reserves is made up of foreign remittances by overseas Pakistanis FDIs not included....of course it has swelled, not because for any love for the country, but the overseas people are forced to send more money due to the higher cost of living expenses being borne by their families in Pakistan....this is happening for the past 6 years now....I am one of the overseas member & I know how I meet both ends , because the cost of living has gone up here in KSA too, yet in order to meet expenses at home, my family is forced to cut down on lot of expenses, so that the family in Pakistan can meet their expenses....I used to send SR 700.00 during Gen M period & now have to remit Sr 1400.00...my salary static for the past 6 years....this is just an example.
Weary...who has subscribed US$2bn euro bond? Mansha? In all the world, he was waiting to invest in Pk at 7-8% yield. and why UBL divestment was 1.5x oversubscribed. FDI is not trigger happy. It takes good 2-3 years for real FDI to start tickling in. Simple logic-if you have ever worked for an organization, count the number of steps and time required to commit first dollar. and number of approval to see real money flow to the project. I hope you understand this point.
@Mujeeb: Good feeling hasn't translated into higher FDI flows. Not sure what this good feeling was good for. It will have evaporated by now anyway after the karachi airport attacks.
At least the current govt. generated a good feeling among investors as compared to the doom and gloom of H1 of last calendar year. Steps in the right direction. Even if 25% of the so many signed MoUs mature to real projects, I'd be glad. We should not expect change overnight. We should not seek a revolution because its always soaked in blood of people.