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Forex reserves plunge to lowest since June 2020

By Our Correspondent
April 15, 2022

KARACHI: Pakistan’s foreign exchange reserves dropped to 2.6 percent in the week ending April 8, the central bank data showed on Thursday, hitting their lowest level since June 2020 due to increased debt repayments and high current account deficit.

Total reserves stood at $17 billion, compared with $17.5 billion in the previous week.

Reserves held by the State Bank of Pakistan decreased by $470 million or 4.1 percent to $10.8 billion, which the SBP attributed to the external debt repayments. The SBP’s reserves, based on average imports of the last 12 months, are only enough to cover nearly two months of import bills.

However, the foreign currency reserves of commercial banks inched up 0.3 percent to $6.2 billion.

One-off payment for settlement of the Reko Diq case, increasing current account deficit and delays in debt roll over resulted in rapid erosion of foreign exchange reserves, according to analysts. Fast depletion in reserves weighed on the rupee, which closed to a record low of 188.18 against the dollar on April 7.

Debt repayments have put pressure on forex reserves with the SBP, which fell by $5.5 billion during February 28 to April 8, 2022, to $10.8 billion. The decrease partly reflects repayment of a $2.4 billion loan from China that is scheduled to be renewed.

Analysts said stopping a decline in reserves was one of the key economic challenges the new government was facing.

Strong relations with the US, China, and Saudi Arabia would be important in determining the outlook of foreign flows to the country and roll over of maturing debt.

Since imports were rising at a rapid pace, the new government would likely continue with import restricting policies. The SBP has already increased the list of items subject to 100 percent cash margin requirement to control inflation and import bill.

Some analysts believe the currency should be allowed to remain at its market determined level, and take any pressure from the external account. Since January to April 7, the rupee has depreciated by 6.2 percent against the dollar, whereas the real effective exchange rate as per the latest SBP report hovers at 97.91 as of February.

“In addition, initiatives for overseas Pakistanis such as Roshan Digital Account (RDA) should be prioritised (inflows of $3.9 billion as of March) and proper channel flows for remittances should be maintained to keep foreign reserves afloat,” according to a report from Arif Habib Limited.

“Moreover, an immediate task that needs to be taken up is foreign exchange reserve management. For that, the primary focus should be on negotiation with the IMF,” it said.