KARACHI: Foreign exchange reserves of the State Bank fell by $173 million during a week due to debt servicing payments, adding more uncertainty to an economy already passing through a difficult phase.

The central bank reported on Friday that its foreign reserve holdings during the week that ended on Feb 2 dropped to $8.044 billion from $8.216bn a week ago.

The country’s overall foreign exchange reserves have also dropped to $13.098bn, including $5.053bn held by commercial banks.

The reserves fell even after an inflow of $700 million from the IMF. The outlook also remains bleak, with bankers and market analysts not anticipating further support from donor agencies or through bilateral loans in the near future.

Moreover, reports of China’s agreement to roll over $2bn in loans set to mature in March have yet to receive official confirmation, leaving the economic future uncertain.

Rupee edges higher to 279.28 to dollar

The situation is exacerbated by upcoming financial obligations, with the State Bank expected to face significant debt servicing requirements in March. To improve its reserves, the central bank has been actively purchasing dollars from the interbank market, SBP Governor Jameel Ahmad recently said.

On Friday, the State Bank reported that the rupee appreciated by six paise to 279.28 to the dollar in the interbank market. The open market reported the rupee at 281 to the dollar, with a five-paisa gain compared to the last session.

The open market has become a significant source of dollar inflows into the interbank market. Representatives of the Exchange Companies Association of Pakistan said that during the first seven months (July to January) of the current fiscal year, it sold about $3bn to the banks.

The State Bank has implemented strict measures to prevent the outflow of dollars, including restricting letters of credit for all but essential imports. These efforts aim to maintain reserves above $8bn and would facilitate negotiations with the IMF for a critical $1.2bn tranche under the ongoing Stand-By Arrangement.

If Pakistan succeeded in convincing the IMF, this would be the biggest amount it could receive from the lender under the short-term loan agreement signed last year.

Experts watching the political situation after elections said the new government must be formed as soon as possible, as this would help minimise the element of uncertainty emerging from the general elections.

Some bankers said inflows from both remittances and foreign direct investment (FDI) would decline in January and February. The remitters and investors would take time to decide about their money once the political dust settled in Pakistan.

Published in Dawn, February 10th, 2024