By end of 2014-15: Forex reserves likely to reach $17 billion

Massive inflows in form of foreign loans to be the reason.

KARACHI:

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 15^th, 2014.

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