SBP’s contract obligations swell 80pc to $3.6bln in June

ISLAMABAD: The future contracts and obligations of the State Bank of Pakistan (SBP) stood at $3.6 billion in June as against $2 billion a year earlier, exerting pressure on foreign exchange reserves of the country, said International Monetary Fund (IMF). 

“…the SBP’s derivative position reached $3.6 billion in net obligations from $2 billion in June 2016, which could put additional pressure on reserves,” the IMF said in a report that concludes the Article IV consultation with Pakistan last week.  

Analysts said if the central bank factors in three billion dollars of payment obligations the country’s reserves would come down to around $17.23 billion as against $20.830 billion reported as on 14 July 2017. 

SBP’s foreign reserves amounted to $15.478 billion, down $718 million as compared to the previous week, while net foreign reserves held by banks were $5.351 billion. The country’s foreign reserves declined amid a widening current account deficit.

The country’s current account deficit hit 4 percent of GDP for the last fiscal year, surpassing the annual targets of the government, State Bank and IMF, as the deficit amounted to $12.098 billion 2016/17 up 1.5 times over the last year. The current account deficit was recorded at $4.867 billion in the previous fiscal year of 2015/16.

Foreign reserves declined to $16.1 billion at end-April 2017 (3.4 months of imports) from $18.1 billion in June 2016 (four months of imports).   The current account deficit, however, declined from a peak of 8 percent of GDP in FY2008 to about 1 percent in recent years. 

“The fast pace of the recent increase, the structure of the deficit — a large trade deficit (6½ percent of GDP in FY2016) covered by remittances (7 percent of GDP) — and losses in international reserves during FY2017 highlight the importance of strengthening Pakistan’s export competitiveness,” said the Fund.

The financial account balance has hovered around $5–5½ billion over 2014–16, helping to finance the current account balance and to accumulate reserves. 

The Fund, however, said the structure of the financial account shows reliance on debt issuance rather than on foreign direct investment flows, which have been on a declining trend over the last decade. 

The net international investment position has been relatively stable, “even if slightly declining in the last years.”  “With increasing CPEC (China-Pakistan Economic Corridor) project implementation, there will likely be a pick-up in FDI, portfolio and other investment over the medium term,” said IMF. 

IMF said the exchange rate continued to remain stable against the US dollar, supported by the SBP’s foreign exchange interventions, and further appreciated 6 percent in real effective terms during the last fiscal year (18 percent cumulatively over the past three years).