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December 11, 2019

State Bank’s forex reserves reach 10-month high on ADB lending

Business

December 11, 2019

KARACHI: The central bank’s foreign exchange reserves shot up almost 10-month high to $10.412 billion as the Asian Development Bank (ADB) transferred a staggering $1.3 billion to Pakistan struggling to stabilise the economy with IMF-backed reforms.

The State Bank of Pakistan (SBP) on Tuesday said the country received $1.3 billion from ADB.

“SBP has received $1.3 billion from Asian Development Bank (ADB),” the central bank said.

The loan disbursement from the Manila-based lender pushed foreign exchange reserves up to $17.293 billion, while the reserves held by the SBP reached $10.412 billion — the highest since March this year. Foreign exchange reserves stood at $15.993 billion as of November 29. The SBP’s reserves stood at $9.112 billion. The ADB’s disbursement is expected to reduce the country’s balance of payments gap.

Pakistan heavily relies on external financing to fund the current account deficit and make foreign debt payments. “These inflows [ADB loan] should narrow the country’s external financing gap,” economist Ashfaque Khan said.

He believes that total foreign financing requirement in the current fiscal year is likely to be in the range of $16.5-17 billion. “The government could require $10 billion to service its foreign debt,” Khan added.

The economist said the country’s current account deficit is expected to be $6.5 to 7 billion in FY2020. “There is no need to attract hot money [foreign investment in government securities] to build up foreign exchange reserves.”

Khan was referring to aggressive foreign inflows into government securities and that inflows crossed $1 billion amid multiyear high of interest rate. The country had signed loan agreements – $1 billion for reforms support and $300 million for energy sector – with ADB, which committed to provide a total of $2.1 billion in policy-based lending during the current fiscal year of 2019/20.

In August, ADB approved a $500 million worth of policy-based loan for Pakistan after a gap of one and half years as IMF-backed reforms in the country persuaded the lender to okay a part of $2 billion committed for the current fiscal year of 2019/20.

In July, Pakistan agreed to an International Monetary Fund’s (IMF) loan program of $6 billion to introduce structural reforms in the economy imperiled by current account deficit.

This was the country’s 13th IMF loan since 1980s and one that started following another one that completed successfully in 2016.

IMF’s facility, as expected, turned on stagnant stream of foreign inflows with other financial institutions contributing to the funding. IMF expected a huge $38 billion of inflows from bilateral and multilateral creditors over its program period of three years. The current account deficit contracted 73.5 percent to $1.5 billion in July-October FY2020. The rupee has appreciated by Rs9 in the past six months.

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