Falling reserves stoke exchange rate fears

Shahid Iqbal Published June 11, 2017

KARACHI: Foreign exchange reserves have continued to deplete by a monthly average of $500 million for the past seven months, raising fears among currency dealers that the dollar could spiral out of control in the inter-bank market.

Despite rising import bill, the exchange rate has been stable in the inter-bank market for more than a year thanks to intervention by the State Bank of Pakistan (SBP) to contain the dollar’s rise. However, currency dealers believe the exchange rate could burst through the SBP-enforced ceiling if the reserves kept falling.

According to the latest SBP report, Pakistan’s forex reserves fell by $3.51 billion since October to $20.52bn on June 2. State Bank’s reserves dropped by $3.22bn to $15.7bn during the same period.

The current government brought down the dollar from Rs108-9 to Rs97 when it came to power four years ago. But it seems to have lost its grip now. For the last seven months, the government has failed to improve SBP reserves amid political turbulence.

Moreover, outflows have been swelling too, particularly the import bill which is likely to touch $50bn this fiscal year.

The outflow of profits and dividends by foreign companies operating in Pakistan could also touch $2bn by the end of the fiscal year; the amount repatriated by these firms already stood at $1.52bn during the 10 months through April.

Experts believe that the government will try its best to keep the exchange rate at the current level until the general election. Similarly, the government will also want to give forex reserves a boost.

However, repayments on borrowed money have started and are set to pick up pace in a couple of years. During the current fiscal year, the government would have to pay about $6bn as debt servicing on foreign loans; the amount will only increase each year with rising Chinese investments in the country.

“Despite fears about the future of the exchange rate, the open market is stable as supplies have increased during Ramazan,” currency dealer Anwar Jamal said.

Published in Dawn, June 11th, 2017

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Shahid Iqbal is a reporter for Dawn based in Karachi with 38 years of experience covering politics and economics. His career includes seven years with the Japanese newspaper Asahi Shimbun, as well as roles at United Press International (UPI) and AFP.

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vikas

Jun 11, 2017 02:59pm

Had to happen one day. With pressures of debt servicing and debt repayments pressure would fall on the Rupee but while Pakistan may appear to benefit on the export front because of this unfortunately the cost of imports would lead to massive inflationary pressure since Pakistan depends on imports of even basic items. Very tough situation and more problems are likely to arise.

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MSUH

Jun 11, 2017 11:13pm

And all this is happening when our major import price is on the lowest, I wonder what will happen when crude oil price goes beyound $100 per barrel. Big reason to worry

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Sameer

Jun 12, 2017 01:51am

The gov played zero role bringing the dollar down. It was their luck; the oil prices plummeted and CPEC initialized, combined with 4g spectrum sales. This also includes the massive loans the government has been borrowing. Eventually the money was going to dry up, joblessness, limited investment, company discouraging tax regimes and the temporary stop of borrowing which will commence as soon as the the election are done with.

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M. Emad

Jun 12, 2017 02:33am

Bangladesh Foreign exchange reserves about $33bn.

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ZAC

Jun 12, 2017 04:50am

@vikas what are you talking about? Pakistan is classified as a semi industrialised nation. In first grade quality goods, Pakistani goods are more expensive than Chinese ones and also provide warranty for return unlike the Chinese goods. I know it because I just built a new house. The biggest import for Pakistan and its weakness is fuel because we don't have much naturally. If you take fuel out, its exports almost cancel out the imports in normal years. Currently, heavy machinery imports have pushed the imports up but that is to be expected. You are welcome to post on our matters but please refrain from saying silly things like we import all basics. Heavy industry equipment is not "basic items".

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