SBP-held forex reserves drop to below $11b due to external debt repayments

ISLAMABAD – Pakistan’s foreign exchange reserves have declined to below $11 billion in last week mainly due to the repayment against previous loans.

“During the week ended on 08-April -2022, SBP reserves decreased by $470 million to $10,849.6 million, mainly due to external debt repayments,” said State Bank of Pakistan on Thursday. Meanwhile, the total liquid foreign reserves held by the country stood at $17.028 billion. Foreign reserves held by the State Bank of Pakistan are $10.849 billion and net foreign reserves held by commercial banks are $6.178 billion. The reserves had declined by around $5.3 billion in just one month. The SBP reserves are under pressure from last few months due to repayment against previous loans. Pakistan net forex reserves held by the State Bank have declined from over $20 billion in August 2021 to just $10,849 million on April 8, 2022.

The reserves are depleting despite previous government had borrowed massively. Pakistan had received $14.5 billion in foreign loans during the first eight months (July to February) of current fiscal year. These include disbursement of $13 billion by the international creditors and nearly $1.5 billion by the overseas Pakistanis. Fitch Ratings has recently noted that Pakistan would need higher financing in current as well as in next fiscal year, which would put more pressure on foreign exchange reserves. It said that recent oil price shock will push up the current-account deficit, adding to already high gross external financing needs from an elevated debt-repayment schedule. “We now forecast a current-account deficit of around 5% of GDP (around USD18.5 billion) for the fiscal year ending June 2022 (FY22), up from 4% in our February review. We expect this to moderate to around 4% in FY23, as oil prices ease,” it said.

Pakistan faces USD20 billion in external debt repayments in FY23, though this includes USD7 billion in Chinese and Saudi deposits that we expect to be rolled over. Higher trade deficits and capital outflows have driven a sharp depreciation of the Pakistani rupee against the US dollar. This, along with debt repayments, has put pressure on liquid foreign-exchange reserves with the State Bank of Pakistan (SBP), which fell by USD5.1 billion between end-February and 1 April 2022, to USD11.3 billion. We believe the decline also partly reflects repayment of a USD2.4 billion loan from China that is slated to be renewed.

Total liquid foreign reserves held by country stand at $17.02 billion

The previous government’s implementation of reforms in line with an IMF programme helped to underpin its access to global debt markets, in our view. This was highlighted by Pakistan’s issuance of a USD1 billion sukuk in January 2022. Since then, the country’s access to private creditor finance has been challenged by external factors, such as rising US interest rates and heightened investor risk aversion around the Ukraine conflict. We believe setbacks to reform or the IMF programme would make access even more difficult.

The change in government may complicate timely completion of the remaining three reviews of the IMF programme. Senior officials from key parties in the new government have signalled that they plan to maintain engagement with the IMF. However, negotiations around key revenue-raising reforms could prove lengthy, particularly as the government is a broad coalition of disparate political parties. New fuel subsidies introduced in March as part of efforts to restrain inflation have already added to the complications facing programme negotiations and medium-term fiscal consolidation, as have upcoming elections, which are still due by mid-2023.

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