KARACHI, Jan 19: Fast depleting forex reserves could pose serious threat to the economic stability as over $1.1 billion slipped away in six months from the reserves. The hard-earned reserves have been facing continuous outflow since the beginning of the new fiscal year from July 1, 2005 and the pace of erosion picked up speed after record increase in the oil prices.

In the first week of July 2005, the country’s reserves were $12.613 billion and it reached to $11.504 billion on January 14, 2006, showing a fall of $1.109 billion or 8.8 per cent. If the outflow of dollars continues with the same pace, the country will face a substantial decline of over $2 billion by end of the current fiscal on June 30.

The reserves held by the commercial banks also showed a declining trend. The SBP faced an erosion of $778 million during the last six months while the commercial banks noted a decline of $331 million in their respective reserves.

The pressure of oil price-hike faced by the SBP resulted in the fast depleting of reserves as for more than a year the central bank has been paying oil import bills. The international oil prices have been fluctuating during the year but most of the time hovered around $60 per barrel that posed a serious threat to many developing economies including Pakistan.

“This is true that the oil prices have gone up and the SBP is facing pressure but there should be some mechanism to check the decline in reserves,” said an analyst.

So far no strategy has been devised to protect the reserves from further depletion. The reserves were built during the last six years by the SBP after spending billions of rupees on dollar buying as well as increased remittances.

The continuous fall in reserves is considered a threat to the stability of the economy as it had been six years back when the economy was at the verge of collapse on account of its ability to pay its external bills.

“The huge current account deficit in the range of $7bn to $9bn at the end of the fiscal may appear as the biggest challenge for the economic managers as remittances from overseas Pakistanis could not be enough to fill the gap,” said analyst Amjad Aleem.

The country is expected to receive around $4.2 billion remittances by the end of the current fiscal. During the first half of this fiscal $2.055 billion were remitted by overseas Pakistanis, official figures showed.

Either the government would have to meet $3 to $5 billion deficit from its own account (SBP reserves) or it would borrow from the market.

“Spending from its own reserves could send a shock to the market and destabilization process would be geared up. I think the government may not opt for this route to address the problem,” said Amjad.

The other option is the borrowing from the international market and donors like IMF, ADB etc. There is a possibility that the government will opt for launching bonds as it is already in the market with Euro bonds and Sukuk bonds.