Depleting reserves

As of August 2021, net reserves with the SBP stood at $20 billion. Net reserves with the SBP have since fallen to $12 billion. Over the past seven months, the SBP has lost $8 billion worth of reserves. Over the past seven months, the SBP has been losing an average of more than $1 billion a month worth of reserves. Red alert: During the week ending March 25, the SBP’s reserves declined by a hefty $3 billion – the biggest weekly fall in Pakistan’s history. Red alert: As of March 2022, the SBP reserves cover less than two months of imports.

As a matter of comparison, the SBP has $12 billion covering 2 months of imports. The Reserve Bank of India has over $600 billion in reserves covering 13 months of imports. Bangladesh Bank has $40 billion in reserves covering eight months of imports.

For the record, the SBP’s reserves of $12 billion are all debt-financed – $6.7 billion from the IMF, $2 billion from Saudi Arabia, $6 billion from China, $2 billion from the UAE and $4.8 billion from financial derivative assets. Red alert: The bottomline becomes negative $9.5 billion.

According to the SBP, over the following 12 months, predetermined short-term net drains on foreign currency are going to be $12.4 billion. According to the IMF, our gross external financing requirement stands at $32 billion and our external debt servicing for fiscal year 2023 is projected at $15.5 billion.

For the following 12 months, we must keep our access to external financing sources – multilateral, bilateral and private creditors – open. Unfortunately, our foreign policy is becoming a major hurdle. We must maintain a national-interest driven, evidence-based foreign policy that facilitates our access to external financing sources-multilateral, bilateral and private creditors. To be certain, without this access we will not be able to manage a full-blown balance of payments crisis.

Political uncertainty means even a faster depletion of reserves. A deadlock over talks with the IMF also means a further depletion of reserves. Central banks maintain reserves for two reasons: to meet balance of payments and to maintain economic stability. Red alert: Against the government’s full-year current account deficit target of $12.9 billion the actual eight-month current account deficit came in at $12.09 billion. According to Dr Hafeez Pasha, “the current account deficit was heading towards a historical record by touching the $20 billion mark or 6 percent of GDP…” If the depletion of reserves at the SBP continues at the current rate we would soon enter a full-blown balance of payment crisis.

Politicians continued playing their political games as inflation was going through the roof, reserves were going down, current account deficit was going up and our external vulnerabilities were becoming a national security threat.

A balance of payment crisis is in essence a foreign currency crisis which means a country is unable to pay for “essential imports or service its external debt repayments.” Consequence: a rapid decline in the value of the Pakistani rupee. Consequence: Inflation. Consequence: Poverty. Consequence: increase in crime. Consequence: a rise in interest rates. Consequence: recession. Consequence: unemployment. Consequence: load-shedding.

The writer is a columnist based in Islamabad. He tweets @saleemfarrukh and can be reached at: farrukh15@hotmail.com