KARACHI, July 19: Gross liquid foreign exchange reserves have fallen from $12.6 billion at end-February to a little more than $12.2 billion on July 10, 2004, according to data released by the State Bank.
This $400 million decline in the reserves in more than four months can be linked primarily to a large trade deficit though there are other reasons as well including pre-payment of $1.17 billion Asian Development Bank debt by the government.
Average monthly trade deficit between March-June 2004 reached $500 million. This was more than three times the average monthly trade deficit of $150 million seen between July 2003 and February 2004.
Senior bankers say that trade deficit is expanding fast also during this month the figures for which would be out during the first half of August. "We see much higher import payments daily than inflow of export proceeds," said treasurer of a major local bank.
During fiscal year July-June 2003-04 imports totalled $15.473 billion against $12.273 billion exports. That resulted in an all time high trade deficit of $3.2 billion. But in the first eight months of the last fiscal year trade deficit had totalled $1.2 billion and the country saw $2 billion deficit in four months to June 2004.
This explains why foreign exchange reserves that rose steadily during July-February 2003-04 fell gradually between March-June 2004. Pakistan had $11.087 billion reserves at end-July 2003 that fell to $12.328 billion at end-June 2004. The reserves went down further to $12.218 billion on July 3 and to $12.203 billion on July 10.
The continual fall in the forex reserves took its toll on the health of the local currency. The rupee shed 77 paisa or 1.3 per cent of its value against the US dollar in the inter-bank market in four months coming down to 58.12 at end-June from 57.35 at end -February.
In the next 10 days the rupee lost 16 paisa more against the US unit to close at 58.28 on July 10 when total forex reserves came down to $12.2 billion from $12.6 billion at end-February.
Finance Minister Shaukat Aziz had said in his budget speech for this fiscal year that Pakistan would keep its exchange rate competitive. The State Bank in its third quarterly report for fiscal year 2003-04 released afterwards also indicated that it would allow gradual depreciation of the rupee if the external account continued to worsen.
By saying that the exchange rates will remain competitive the finance minister has clearly indicated that the rupee will be allowed to depreciate to benefit the exporters.
This has become all the necessary also because the government is expected to set the export target at $13.3 billion for this fiscal year up nine per cent from 2003-04 exports amidst liberalization of imports regime.
Pakistan can achieve a higher export target amidst lowering of import duties on a broad range of items if the rupee does not remain over-valued particularly in relation to other regional currencies including the Indian rupee. Recently, the Indian rupee has moved both ways against the US dollar-rising to 45.64 on July 12 from the end-June close of 45.98 and falling to 46.17 on July 16.
On Monday Pakistan rupee shed five paisa at 58.25 a US dollar in the inter-bank market from the weekend close of 58.20. Bankers say heavy dollar buying by a state-run bank for government debt payment coupled with importers-led demand weakened the local currency.
