KARACHI: Foreign exchange reserves of the State Bank of Pakistan (SBP) declined by more than half a billion dollars within a week mainly on account of international debt servicing, data released by the central bank showed on Thursday.

Reserves of the SBP dropped by $562 million to $17.03bn in the week ending on Jan 14. The central bank uses its foreign exchange reserves for the servicing of international debt, which has been increasing rapidly for the last three years.

The SBP said the latest week-on-week drop of $562m in reserves is because of external debt and other payments.

Reserves of the SBP and of the country as a whole have been declining since August. Data shows the SBP has lost $3.04bn since August 2021 when its reserves amounted to $20.07bn. Statistics available on the SBP website show that was the highest amount since 2016 while researchers reported that the figure constituted an all-time high.

External debt, other payments caused the drop

However, rising debts, particularly commercial loans, have consumed a large chunk of the central bank’s reserves.

The external debt of the country is currently over $127bn. Pakistan needs over $20bn during the current fiscal year to meet its foreign obligations.

Despite record remittances during the first half of the current fiscal year, the country needs more dollar inflows to meet the current account deficit. The gap crossed the $7bn mark for July-Nov 2021-22. With the increasing trade deficit, there is a fear that the current account deficit will be higher than what the economic managers initially expected.

Total foreign exchange reserves of the country have also declined by $3.74bn since August 2021. Their sum hit the record high of $27.08bn in August.

The least impact was on the reserves held by commercial banks. The outflow was $680m between August 2021 and Jan 14. The current amount of foreign exchange reserves held by commercial banks is $6.31bn. In fact, reserves of commercial banks improved by $11m during the week that ended on Jan 14.

The country is preparing to launch a $1bn-1.5bn Islamic bond in the international market, which will improve foreign exchange reserves. In addition, the government is also trying to reduce its import bill to cut the trade deficit, which will ultimately improve the country’s balance of payments.

The SBP announced another measure on Jan 19 to facilitate exporters who are a major source of foreign exchange earnings. The central bank digitalised the process for export financing and made it online. The move is aimed at increasing exports, which showed 25 per cent growth in the first half of the current fiscal year.

Published in Dawn, January 21st, 2022