KARACHI: Banks are facing a scarcity of foreign currency, making it harder for them to provide dollars to importers for making payments, resulting in low or negative swap premiums, as the foreign exchange reserves deplete fast in the wake of dried external financing, analysts said.
The dollar liquidity crunch in the interbank currency market is exerting pressure on the rupee as the central bank has not been supplying dollars to the market to pay for import bills and the hefty imports, including oil, is being fully met by the market.
“Banks are going through a liquidity crisis as their nostros have been running short of dollars. They’ve been engaged in buy-sell (buy ready, sell forward) to build up their nostros which in turn have depressed forward swaps so much so that they’ve turned negative,” said Komal Mansoor, the head of research at Tresmark.
Pakistan’s central bank’s forex reserves have tumbled $7.62 billion since January 2022. They now stand at $8.98 billion, barely enough for 1.32 months of imports.
The reserves have been dwindling since a $6 billion International Monetary Fund bailout package stalled.
The government has raised fuel and electricity prices sharply to unlock the remaining $3 billion of a current loan by the multilateral lender.
The dearth of dollars could deteriorate as the country’s trade deficit is expected to widen this fiscal year. The trade deficit increased by 58 percent to $43.33 billion in July-May FY2022.
The local currency has weakened by 2.38 percent this week. The greenback strength and the slide in the rupee translate into higher import bills and therefore rising inflation.
“With almost no free liquidity, it is expected that the Central Bank does not have the resources to control the market. With low levels of Inflows and substantial outflows, especially end of June related, SBP is dipping into commercial banks’ share of reserves to square payments, resulting in low or negative swap premiums,” said Tresmark in a client note.
“Though this has been the case for the last 4 weeks when Rupee breached the 190 level some analysts seem to have picked it up now. This, though not unusual, goes to show a serious dearth of liquidity,” it added.
The rupee’s misery was compounded by ultra-low levels of forex reserves. Pakistan’s reserves fell by another $234 million to close just below $15 billion. SBP’s share in reserves is just under $9 billion and consists of $3.9 billion in gold and $4.2 billion notionally generated through buy-sell swaps (not new, been the case for the last 3 years), it noted.
Saad Hashemy, executive director at BMA Capital Management, said the above [low dollar liquidity in interbank] would likely be resolved as soon as bilateral and multilateral funding was unlocked in agreement with the IMF.
“The country's external gap is fully funded in an IMF programme,” Hashemy added.
The country’s finances may improve if it receives fresh inflows. The government needs to make all-out efforts on having the IMF on board and jump the queue as the county cannot afford even another week.
The government remains engaged with the IMF this weekend and it should have a soft go ahead from the IMF within a week. But the ministry of finance will have to address the key pain points of energy subsidies, levies on fuel and minor areas of personal tax, subsidies to state-owned enterprises.
The market expects inflows from friendly countries and multilateral lenders if the IMF money comes in, the proceeds held back by exporters and remitters will start flowing in.