KARACHI: The central bank’s foreign exchange reserves dropped for the fourth consecutive week to below $4.2 billion, official data showed on Thursday, barely enough to cover a month of controlled imports.

The latest decline in the State Bank’s reserves, during the week ended May 19, was $119 million. Commercial bank reserves also fell by $87.5m, to $5.54bn during the week. Therefore, the country’s overall foreign exchange holdings were down $206m to reach $9.73bn.

Currency experts said the outflow of each dollar from the country was crucial for the economy and significantly impacted the exchange rate.

The latest decrease in dollar holdings come even as the State Bank has kept tight control over imports by putting strict conditions for banks to open letters of credit.

Financial experts say this tough control has produced two visible results: the importers started buying dollars from illegal markets for imports and the smuggling of goods on large scale.

The markets are full of smuggled Iranian and Chinese goods along with finished textile products from Bangladesh.

The smuggling of goods and buying of dollars by importers from illegal markets have created a wide difference in dollar prices in the open and interbank markets.

The difference has exceeded to Rs22 per dollar, attracting overseas Pakistanis to stop using legal channel and benefit from the large gap. Remittances sent by Pakistanis working abroad fell by 29 per cent in April, reflecting the deviation of inflows from the legal to illegal channel.

If the price difference persists, it would compel the State Bank to slash the rupee against the US dollar while it could further reduce the inflows.

Published in Dawn, May 26th, 2023