Forex reserves fall to $16.5bn on debt servicing

KARACHI: Pakistan’s foreign exchange reserves dropped by $115 million or 0.7 percent during the week ending April 30 on the back of increasing external debt payments and higher current account deficit, the central bank reported on Friday.

The total liquid foreign reserves held by the country stood at $16.5 billion, compared with $16.6 billion in the previous week.

The State Bank of Pakistan (SBP) reserves recorded a decline of $59 million to $10.5 billion on external debt payments, the SBP said. The reserves held by commercial banks fell 0.9 percent to $6.0 billion.

The country’s foreign currency reserves are dwindling as foreign inflows getting dried, and a persistent decline in the reserves is putting pressure on the external current account. With the latest forex numbers, the SBP’s reserves are enough to cover less than two months (1.57 months) of import payments.

The International Monetary Fund (IMF) has agreed to revive the Extended Fund Facility, but the formal approval may take another 4-6 weeks and will pass the crucial new budget period. The Chinese deposits have not yet materialised. The country has also not received some deposits from the Saudi government.

Finance Minister Miftah Ismail on Wednesday told a news conference that the government had requested Saudi Arabia not to withdraw its deposits given to the State Bank of Pakistan and extend its oil facility for Pakistan.

Analysts said the country’s external account remained vulnerable for fiscal year (FY)’22 with current account expected to touch $17.6 billion by the year-end.

“Consequently, we see the deficit’s current size as an issue leading to a weaker PKR at this point, however, recovering once the commodity cycle and domestic demand normalizes,” a latest report from Arif Habib Limited said.

“All in all, we see further improvements in exports and deceleration in imports therefore, expect the current account to significantly come down during FY2023, clocking-in at $11.1 billion,” it added.

Whilst removal of mobility restrictions and recovery in opportunities for labor migration resulted in higher legal migration flows, hence leading to pressure on inflows of remittances to Pakistan.

Despite this, related flows proved to be resilient with monthly average still above the $2 billion mark since June 2020. Remittances totaled $23 billion during the first nine months of FY2022, representing a 7 percent year-on-year (YoY) expansion.

Remittances became the largest source of capital flows into Pakistan last year and we expect this to remain the case in 2022.

Geopolitical contexts, lifting of containment measures across the regions and economic imbalances aggravated by uneven global recovery, will continue to be the main drivers of related flows, the report said. High imports mainly due to international commodity prices and pent up domestic demand led to pressure on current account deficit and the rupee, subsequently.

“Going forward, based on the assumption that Pakistan successfully completes the seventh review of IMF and subsequently tranche is released followed by potential inflows from bilateral agreements, import bill starts tapering off and momentum in export growth continues,” the report said.