KARACHI: At the end of the calendar year 2014, Pakistan’s foreign exchange reserves witnessed a sharp increase of over $7 billion while commercial banks showed a decline during the period.

The State Bank’s latest report shows the government succeeded to improve its performance on external front despite huge debt servicing of about $7bn in FY14 and a deficit of over $3bn in the current account.

According to the SBP data, the foreign exchange reserves of the State Bank on January 3, 2014 were $3.245bn which jumped to $10.364bn at the end of December 2014, an increase of $7.119bn.

After a stressful beginning, Pakistan’s balance of payments improved considerably by June 2014.

The SBP’s liquid foreign exchange (FX) reserves posted an increase of $3.1bn, compared to a cumulative decline of $8.8 billion in FY12 and FY13.

This improvement was primarily an outcome of the country’s re-engagement with the International Monetary Fund, which promised disbursements of $2.2bn every year till FY16.

This bail out, and the comfort it gave to other external lenders (mainly the World Bank and ADB), enabled the country to meet debt payments during the year. External debt servicing of $7bn during FY14 was larger than the size of SBP reserves.

Pressure on the SBP reserves eased further as Pakistan received $1.5bn under the Pakistan Development Fund in February and March 2014; issued Euro Bonds in April 2014 worth $ 2bn; and also managed to obtain fresh loans of $1bn from the World Bank in the quarter April-June.

In addition, proceeds from the long awaited 3G/4G auction and UBL divesture also contributed to the reserves build-up.

Due to these inflows, along with spot purchases from the interbank market, SBP ended up with $9.1bn reserves by end June 2014.

More importantly, SBP reserves now have a more robust standing in view of pre-determined short-term drains like maturing loans and forward or swap contracts.

The only negative change was the fall in the reserves of the scheduled banks. The banks maintained higher reserves while the State Bank’s reserves had been falling sharply, providing strong support the country’s overall reserves.

The huge oil payments are made through the private banks and the fall in the reserves of the scheduled banks could be a sign of concern for the government. Currency experts believe the banks could improve their reserves since the inflows from abroad has been rising and oil payments could see a cut in the next half of the current fiscal.

Published in Dawn, December 30th, 2014