Dollarisation of economy taxing external account

ISLAMABAD: Pressures are mounting on the external account as foreign currency deposits held by the commercial banks dried up $350 million in a week, suggesting dollar stashes are being siphoned from bank accounts to elsewhere.

Dollarisation is rampantly increasing in the economy so Islamabad will have to manage dollar inflows on an immediate basis to shore up dwindling foreign currency reserves, according to economists.

Amid ongoing dollar flight, this $350 million is likely to have been moved from bank accounts to the bank lockers during March 25-April 1, 2022 period owing to a variety of reasons, including exploring options offering higher returns.

Prime Minister Shahbaz Sharif-led regime must have a Plan B for mustering up $10-11 billion from friendly countries if International Monetary Fund (IMF) refuses to be lenient towards politically elected government at this juncture, independent economists said.

When the government is all set to enter election mode then accepting all IMF conditions may not be feasible on immediate basis, they added.

The foreign currency deposits lying with banks stood at $6.5 billion on March 25, 2022, but eased to $6.15 billion on April 1, 2022, an erosion of $350 million just in a week. There’s a need to ascertain what went wrong that led to this huge fall in foreign currency deposits as some independent economists and analysts fear customers might have started shifting dollars from bank accounts to other locations.

Former finance minister Dr Hafiz A Pasha said Pakistan was facing a severe balance of payment crisis whereby current account deficit was rising and foreign exchange reserves were depleting at accelerated pace.

“It’s a serious crisis like situation, which cannot be tackled with piecemeal approach,” Dr Pasha concluded.

Foreign exchange reserves held by State Bank of Pakistan (SBP) nosedived by $5 billion from $16.2 billion on March 4, 2022 to $11.3 billion on April 1, 2022.

To make the economic concerns worse, Miftah Ismail, the expected finance adviser to Prime Minister, has projected yawning fiscal and current account deficits for this fiscal year after taking an official briefing from Ministry of Finance. The budget deficit might hover around Rs5.6 trillion to Rs6.4 trillion for the current fiscal year because of the rebasing of national accounts that had jacked up the projected size of overall economy to Rs63.8 trillion for FY2022. The current account deficit has been projected at 6.5 percent of GDP, equivalent to $20-$21 billion for the this fiscal, which will be second highest in terms of GDP after Musharraf regime in 2007-08 when it had touched 8.1 percent of GDP.