KARACHI: The State Bank of Pakistan (SBP) purchased $5.5 billion from the banking market during the June-December period and the market expects the total amount of dollars bought at the end of current fiscal year (FY25) would easily exceed borrowing from the IMF in three years.

Despite this massive purchase of dollars, the foreign exchange reserves of the State Bank fell by more than $500 million during last week, reflecting weak foreign exchange reserves and a poor foreign exchange policy that is unable to manage the huge inflows into the country.

The country is expected to receive over $35bn in remittances this year, in addition to inflows from the IMF, World Bank and a rollover of over $14bn external loans. The remittances received during the first eight months (July to February) of the current financial year have already exceeded by $6bn the amount for the entire previous fiscal (July 2023 to June 2024).

But economic managers are unable to manage the huge inflows while the current account during the 8 months is still positive.

Forex reserves fall by $540m in a week to a six-month low of $10.6bn

The State Bank purchased $5.52bn during the June-December period of 2024 from the interbank currency market. It is nothing unusual for the central bank to buy dollars from the market, but the size of the amount seems to be growing every month. The only exception has been that it bought $536m in December — less than half the $1151m purchased in November.

The SBP purchased $573m in June last year, $722m in July, $569m in August; $946m in September and $1026m in October.

The buying volume indicates that liquidity in the currency market stabilised the exchange rate and prompted the exporters to sell their proceeds.

Financial experts say the government must come out with a strategy to use the high inflows received through remittances. The inflow of $35bn will be gobbled up by the big payments the country still needs for debt servicing every year — no less than $25bn.

According to bankers, the IMF has not allowed the State Bank to bring down interest rates as the move would set off a chain reaction — it would make money cheaper, resulting in a jump in imports, widen the trade gap and ultimately lead to a current account deficit.

So far the 12 per cent interest rate has been unable to coax trade and industry into borrowing from banks and investing in economic activities at home.

State Bank’s reserves fall

The foreign exchange reserves of the State Bank fell by $540m during the week ending on March 21.

According to a press release, the reserves fell to a six-month low of $10.60bn due to external debt repayments. The reserves stood at $10.7bn in September.

The country’s total reserves fell to $15.5bn, including $4.94bn with commercial banks.

As per the agreement with the IMF, the reserves should be $13bn by the end of the current fiscal year.

But the reserves are likely to get a boost with the expected inflows of $1.1bn after the Staff Level Agreement with the IMF. At the same time, the country could receive $1.3bn from the climate resilience fund.

Currency experts believe the current financial year is safe as far as the external debt repayment and stable exchange rate are concerned. However, the failure to boost exports would remain a big hurdle during the next financial year.

Published in Dawn, March 28th, 2025