On Thursday, it was reported that following a week-on-week massive outflow of $869 million for debt repayments, the foreign exchange reserves of the State Bank have been dragged below the $15 billion mark for the first time in almost a year. The SBP forex holdings recorded a fall of $1.424bn in 18 days of this month while it has lost about $5.11bn since August 2021. In addition to external payments, the rapid rise in the country’s import bill has also put a strain on its foreign exchange reserves as the trade deficit has more than doubled during the first half of this fiscal year.
While this drop may seem alarming, some financial market experts have pointed out that this was not unexpected and that low reserves do not necessarily imply that the situation is spiralling out of control. It also cannot be said for certain that low reserves will adversely impact the exchange rate because that is influenced by a variety of factors such as higher oil process and higher demand from importers.
However, depleting foreign reserves do raise concerns about how we will meet our upcoming overseas debt repayments. As per the international benchmark forex reserves should be sufficient to cover three months of imports, but analysts claim that our current reserves probably only cover 2.2 months of imports.
We have been here before as well, and this perhaps gives an opportunity to reflect on our debt servicing numbers and what we can do to get rid of this burden going forward. The State Bank in recent times has been claiming that proper funding is available to meet the current account deficit and external debt servicing. It is also pinning hopes on receiving remittances worth $30 billion in FY22, and the government is also planning to launch another sukuk issue of $1bn during the current fiscal.
The government has also taken other stop-gap measures as it recently got a $300 million loan from the Asian Development Bank, and China has also agreed to rollover $4.2 billion debt that was maturing this week. Both these developments will provide major relief to the government while it is engaged with talks with the IMF. According to the IMF, Pakistan’s gross external financing requirements are estimated at $30 billion for the current fiscal year that will increase to $35 billion in the next fiscal year. We cannot continue to perpetuate this cycle and need to look for non-debt creating inflows—foreign direct investment is an area that needs a lot of work—to increase foreign exchange reserves.
While this drop may seem alarming, some financial market experts have pointed out that this was not unexpected and that low reserves do not necessarily imply that the situation is spiralling out of control. It also cannot be said for certain that low reserves will adversely impact the exchange rate because that is influenced by a variety of factors such as higher oil process and higher demand from importers.
However, depleting foreign reserves do raise concerns about how we will meet our upcoming overseas debt repayments. As per the international benchmark forex reserves should be sufficient to cover three months of imports, but analysts claim that our current reserves probably only cover 2.2 months of imports.
We have been here before as well, and this perhaps gives an opportunity to reflect on our debt servicing numbers and what we can do to get rid of this burden going forward. The State Bank in recent times has been claiming that proper funding is available to meet the current account deficit and external debt servicing. It is also pinning hopes on receiving remittances worth $30 billion in FY22, and the government is also planning to launch another sukuk issue of $1bn during the current fiscal.
The government has also taken other stop-gap measures as it recently got a $300 million loan from the Asian Development Bank, and China has also agreed to rollover $4.2 billion debt that was maturing this week. Both these developments will provide major relief to the government while it is engaged with talks with the IMF. According to the IMF, Pakistan’s gross external financing requirements are estimated at $30 billion for the current fiscal year that will increase to $35 billion in the next fiscal year. We cannot continue to perpetuate this cycle and need to look for non-debt creating inflows—foreign direct investment is an area that needs a lot of work—to increase foreign exchange reserves.
