Bold steps needed to check falling forex reserves

KARACHI: The country’s foreign exchange reserves are feared to further deteriorate if the policymakers failed to take ‘orthodox’ measures to plug up bleeding balance of payments, analysts warned on Thursday.  

An eminent economist said the reserves fell $5 billion since October last year, which was approximately 30 percent of the total foreign exchange reserves of State Bank of Pakistan (SBP).

“Despite a massive borrowing from external sources, the country is experiencing at least $1 billion decline in reserves per month,” he said on condition of anonymity. “I fear that foreign exchange reserves are expected to further deteriorate and slide to around $5 billion in the next five-six months.”

SBP’s foreign exchange reserves dropped to $14.3 billion during the week, ended August 11, equivalent to less than three months of imports.  The country’s total foreign liquid reserves fell to $19.941 billion during the last week from $20 billion a week earlier. Foreign exchange reserves of banks stood at $5.631 billion.

An analyst said the foreign exchange reserves are being hit from all sides. Exports and remittances are declining, foreign private investment is not forthcoming in large amounts, US assistance has been frozen and net inflow of multilateral lending is on the decline. 

In addition, imports are rising and profits repatriation is increasing fast. Political situation is ripe for larger capital flight, he said. Analysts said there could be a serious balance of payments crisis in March-April and there are chances that the country will again seek financial assistance from the International Monetary Fund (IMF) to ease balance of payments difficulties.

“Pakistan will have to follow 'orthodox' policies to mitigate the impact of the stress on the balance of payments,” ex-economic advisor Sakib Sherani said. “These include tighter monetary policy i.e. higher interest rates, a depreciation of rupee, temporary measures to dampen non-essential imports and increasing the size of the swap facility with China.”

Former central bank’s governor Muhammad Yaqub, however, said the positive impact will come with considerable time lag and there would be short term social and political consequences. 

“Election fever, political uncertainty and weak governments will not create an environment for such reforms,” Yaqub added. Besides, he said the forthcoming balance of payments crisis will be deeper and more fundamental. 

“It will not be possible to overcome it by patchwork of another IMF programme of the previous type,” he added. “It would have to be addressed with structural reforms of the monetary, fiscal and exchange rate policies in a coordinated and comprehensive way.”

Economist Ashfaque Khan said SBP built up most of its reserves through external borrowing. It also borrowed around $4 billion from banks in forward market on short-term basis, “so as of now, the (actual) reserves held by SBP stood at $10 billion.”

“Likely availability of external financing from various traditional sources, Chinese sources, and FDI (foreign direct investment) would at best be in the range of $12-12.5 billion,” he added. “This leaves a financing gap of $10.5-11.5 billion in FY18.”

Khan said current account deficit may widen further to $16-16.5 billion during the current fiscal year. “With $7-7.5 billion debt servicing, the financing requirement will jump to $23-24 billion in 2017-18.”

IMF repeatedly urged government to depreciate rupee as it attributes a persistent decline in the foreign exchange reserves to a stable rupee/dollar exchange rate.   Yet, Yaqub argued that devaluation alone will achieve nothing.

“Exchange rate flexibility in the context of an expansionary fiscal and loose monetary policy will only add to the inflationary spiral,” he said. “The government must start from budget reform, controlling the quasi-fiscal deficit by stopping the bleeding of the public sector enterprises and freeing the monetary policy from the burden of budget financing.”

Former SBP governor called for an export-led growth. Domestic consumption will need to be curtailed to promote savings to finance investment, he said. “The foundation of economic management or mismanagement has to be shaken up.”