KARACHI: Foreign exchange reserves have been dropping by a monthly average of half a billion dollars, making it difficult for the government to strike a balance between the outflow and inflow of greenbacks.

Market sources said public-sector companies are not buying dollars from the interbank market. Instead, they are taking loans so that foreign exchange reserves of commercial banks remain intact.

The State Bank of Pakistan (SBP) reported on Thursday reserves fell to $21.15bn, which shows a drop of about $3bn in the last six months.

The SBP report said the central bank’s reserves decreased $366 million to $16.05bn due to external debt servicing and other official payments during the week ending on April 21.

The SBP has lost about $2.9bn since October 2016, which is a result of the rising current account deficit that widened to $6.1bn in the first nine months of the current fiscal year.

Currency dealers report no change in the exchange rate despite the country’s declining capacity to service foreign debt. However, the situation can change in about six months.

A survey conducted by Tresmark, a terminal that tracks the global currency market, showed 70 per cent traders within banks and financial market expect the rupee to remain stable until the end of June. About 76pc of them expect the rupee to depreciate up to 3pc by June 2018 while 18pc expect the exchange rate to reach Rs110 or above.

“We are expecting reserves to go up with fresh dollar-based sukuk issuance and with China willing to lend $750m before the end of June,” said Eman Khan of Tresmark.

Pakistan’s reserves have lately been built on borrowed money. Policymakers were unable to address the foreign exchange bleeding caused by the trade deficit, said Ms Khan.

“Even if we account for the expected foreign direct investment (FDI) over the next three years, the recurring deficit will still be there and most likely worsen as oil prices fluctuate globally. Similarly, solid initiatives or reforms to boost supply-side policies have been missing.”

Market experts said swap premiums have remained within the same range over the last few weeks. There is an increasing interest in booking forwards by importers. Exporters are still selling dollars forward in spite of low premiums for the one to two-month tenors.

“Devaluation in the currency will not come without a cost as inflation will spike and might need to be tempered with higher interest rates,” said Faisal Mamsa of Landmark Investment.

“It will also adversely impact the performance of corporate (entities), especially state-owned enterprises (SOEs) that have taken dollar-based loans,” he said.

The SBP report showed that reserves of commercial banks have remained unchanged around $5.1bn since October.

Published in Dawn, April 28th, 2017