Pakistan saves $4bln in loan repayments on yen strength

ISLAMABAD: Pakistan managed to save at least three billion dollars in loan repayments to Japan during the past four years as rise in Japanese yen value against dollar turned out to be a blessing in disguise for the south Asian economy faced with widening current account deficit, officials said on Saturday. 

“Fluctuation of yen against dollar helped Pakistan in getting benefits of three to four billion dollars in loan repayments,” an official said.  

Yen’s value reached to one and half year high of 111 to one dollar and edged up nearly nine percent on foreign exchange markets last year, the highest among 10 industrial nations. 

The Japanese government, however, is wallowing to keep yen under control to wake up its snoozing inflation. 

Officials said Pakistan received around $35 billion as external loans during the last fiscal year of 2015/16 to meet its financing needs of $30 billion.   

Currently, the total loan assistance from the Japanese government stands at $960 million and the grant at $156m.

Officials said the country’s current account deficit amounted to $20 billion in the last four years. The main surge sprang in FY2017 when current account deficit peaked to $12.2 billion, equal to four percent of GDP, from eight billion during three years.  

Analysts were anticipating a widening current account deficit for 2016/17 due to higher imports on more than $50 billion China-Pakistan Economic Corridor projects (CPEC) and recovery in international oil prices as well as sluggish remittance inflows and subdued exports.   

Imports rose 18.67 percent to $53 billion in FY2017, while export fell to $20.448 billion during the period.

Export sector, however, started to show recovery. Exports grew 13.2 percent in the first three months of the current fiscal year, a good omen for the fragile external sector and the economy that posted a decade-high growth of 5.3 percent in FY2017.

The officials said foreign exchange reserves climbed to $16 billion in the last four years from six billion dollars earlier.  

Analysts, however, said the Stat Bank of Pakistan’s foreign exchange reserves almost reached to the level of FY2015 after touching nearly $19 billion last year. 

SBP’s data showed that its existing reserves are hovering around 14 to 15 billion dollars. They stood at 13.53 $billion by June-end of 2015.  

Topline Research, in a report, forecast that current account deficit is likely to reach $16.39 billion in FY2018. In the following years, the deficit is, however, likely to slid at $14.73 billion in FY2019 and $13.52 billion in FY2020. 

“We expect the current account deficit to be in the range of 5 to 5.5 percent of GDP in FY2018, (which) may result in further depletion of SBP’s FX reserves by $3 billion to $13 billion – below 3-month of import cover,” Saad Hashemy, director research at Topline Securities said. “We estimate that funding gap of $10 to 11 billion for FY2018 will likely be arranged from World Bank/Asian Development Bank and dollar bonds/sukuks,”

Hashemy said short-term debt is a temporary measure and is not sustainable. 

“The government after elections in FY19 will need to take strict measures, including rupee devaluation, hike in interest rates, duties on non-essential imports and incentives for exporters,” he added.