ISLAMABAD-Pakistan’s foreign exchange reserves are depleting sharply due to the repayment of previous loans, as the county repaid $922 million against previous loans in last two weeks.

Foreign exchange reserves held by State Bank of Pakistan had declined by $342 million during week ended on 25-September-2020. Later, the reserves had further tumbled by $580 million in the week ended on 02-October-2020. However, the inflow of $300 million from Asian Development Bank (ADB) had helped the SBP in maintaining its reserves. 

The total liquid foreign reserves held by the country stood at $19.351 billion on 02-October-2020.The break-up of the foreign reserves position shows that foreign reserves held by the State Bank of Pakistan are $12.154 billion and net foreign reserves held by commercial banks are $7.196 billion.

The country had already repaid $484 million against old loans during the month of July this year. The heavy repayments on external account may further aggravate the situation in coming months. Pakistan has to repay $10.363 billion against previous loans and interest payment during current fiscal year. Of which, $8,338 million (82 percent of total external public debt servicing) was repaid as principal and $1,802 million (18 percent) as interest on the outstanding stock of external public debt. According to the ministry of Economic Affairs, around 65 per cent of total external public debt repaid during July of fiscal year 2020-21 constitutes the repayments of some of the foreign commercial loans and international Sukuk which were obtained/issued by the previous government. During the fiscal year 2020-21, the government settled $51 million worth of foreign commercial loans. Similarly the government has also repaid $331 million to multilateral and $102 million to bilateral development partners. Considering foreign exchange constraints, financing of development projects and repayments of these huge external public debts compel the incumbent government to further borrow from multiple sources.

However, the controlled current account deficit would help the government in improving the foreign exchange reserves. Pakistan has registered a current account surplus for the second straight month in August on account of remittances sent in by the expatriates as well as cheaper imports. According to the State Bank of Pakistan (SBP), the current account balance remained in surplus “amounted to $508 million and $297 million during July and August 2020”, respectively. In addition, the cumulative current account surplus came in at $0.805 billion in the July-August 2021 period, as opposed to a deficit worth $1.2 billion in the comparable time frame, last year.

The SBP had said that efforts to attract workers’ remittances, flexible exchange rate and relatively benign import prices explain the improving current account balance. The Asian Development Bank had recently projected that Pakistan’s current account deficit is anticipated to remain contained at the equivalent of 2.4% of GDP in FY2021, unchanged from the ADO 2020 forecast. Exports are expected to grow in FY2021 with the likely pickup in economic activity in Pakistan’s major trade partner.