Forex reserves reach 4-month high as Eurobond, sukuk proceeds land

KARACHI: Pakistan’s foreign exchange reserves rose to four-month high of $20.986 billion as the government received foreign inflows of $2.5 billion on account of dollar notes, the central bank data showed on Thursday.

“SBP has received $2,500 million on 5 December, 2017 as proceeds from Pakistan sovereign bonds and Pakistan International sukuk, after which SBP’s reserves stood at $14,883.1 million, and total liquid foreign reserves at $20,986.4 million,” the State Bank of Pakistan (SBP) said in a weekly statement on foreign exchange reserves.

Last month, Pakistan raised $1.5 billion via 10-year Eurobond at 6.875 percent and $1 billion through 5-year sukuk at 5.625 percent to arrest the decline of foreign reserves. In June, foreign exchange reserves stood at $21.401 billion.

Analysts said the increase in reserves could provide a relief to the country’s deteriorating balance of payments position. “This is likely to ease current account deficits and financing pressures and support external debt obligations during the current fiscal year,” an analyst said.

The current account deficit widened to $5 billion during the first four months of the current fiscal 2017/18 as compared to $2.3 billion in the corresponding period a year earlier. SBP, in its recent monetary policy statement, warned that widening current account deficit and slight increase in workers’ remittances pose risks to external sector.

But, Moody’s assesses Pakistan’s external vulnerability risk as low, reflecting a relatively modest current account deficit, half of which is financed by stable foreign direct investment. Critics said it has been the country’s tragedy that every government resorts to costly foreign and inflationary domestic borrowing to tide over the budget and balance of payments deficits in order to avert ‘painful’ policy decisions.

“The situation is more gravest now when the country is heavily indebted and at the same time the only avenue of borrowing available to the government is to borrow short at high interest rates from the international capital markets,” an ex-governor of SBP said, requesting anonymity.

“The government borrows more on commercial terms to cover the rising current account deficit.” Government spent Rs445.370 billion in debt repayment (local and external), equivalent to 1.2 percent of GDP, in the first quarter of FY2018.

In July-September, gross external financing received by the country from all multilateral and bilateral creditors stood at Rs150.154 billion, whereas external debt repayment consumed a major chunk of Rs142.208 billion during the period, so net financing for budget support shrunk to just Rs7.946 billion.

A senior economist said the country is to make debt repayment of $750 million on account of Eurobond in the coming May, while debt repayments under the International Monetary Fund’s $6.6 billion loan program are also due in March 2018.

The SBP’s data showed that total liquid foreign reserves held by the country fell to $18.744 billion during the week ended November 30 from $19.693 billion a week earlier. The central bank’s reserves dropped $887 million to $12.660 billion owing to external debt and other official payments.

Another economist said the short-term approach of reliance on borrowings creates deeper long-term budgetary and balance of payments problems. “But nobody cares about the long-term harmful effects of short-term commercial borrowing from abroad and at home.”