“When you say record-high forex reserves, you have to be realistic as well, as out of the reserves nearly $8 billion is the amount we have borrowed from IMF (International Monetary Fund) and then there are other foreign loans, so we can say around 55 per cent of the reserves are Pakistan's, the rest is on loans,” said Khalid Iqbal Siddiqui, director at Invest and Finance Securities Ltd. - File Photo.

KARACHI: Pakistan's foreign exchange reserves are at a record high yet the sustainability of those reserves are a cause for concern in the medium term, analysts said on Friday.

Foreign exchange reserves rose to an all-time high of $17.95 billion for the week ended March 26, but eased to $17.31 billion in the week ended April 9.

“When you say record-high forex reserves, you have to be realistic as well, as out of the reserves nearly $8 billion is the amount we have borrowed from IMF (International Monetary Fund) and then there are other foreign loans, so we can say around 55 per cent of the reserves are Pakistan's, the rest is on loans,” said Khalid Iqbal Siddiqui, director at Invest and Finance Securities Ltd.

Pakistan entered into an IMF loan programme in November 2008 to avert a balance of payments crisis and so far about $8 billion has been lent to the country, with an additional $451 million loan to cope with the devastating summer floods that caused damages around $10 billion.

“If one were to take the IMF reserves out of the equation, it (Pakistan's foreign exchange reserves position) is not that solid,” said Rune Stroem, Country Director of Asian Development Bank to Pakistan last week.

Pakistan's forex reserves have grown steadily thanks to higher export proceeds as well as record inflow of remittances but the sustainability of both are also questionable, analysts said.

“Growth in exports appears to be a function of rising unit prices,” said the State Bank of Pakistan in its second quarterly report released last week.

Exports increased 26.5 per cent in the first nine months of fiscal year 2010/11, mainly due to the textile sector.

However analysts said it is important to note that the value of exports has gone up due to a rise in cotton prices but not the quantity. Once cotton prices decrease that may lead to a decrease in exports as well.

The narrowing of the trade deficit is “mainly due to transitional reasons,” according to the central bank.

“Another factor to worry about is the increase in international oil prices which comes with a lag to Pakistan,” said Asif Qureshi, director at Invisor Securities Ltd.

The other factor that has supported the rise in foreign exchange reserves is remittances from overseas Pakistanis.

Remittances by Pakistanis overseas increased by 22.37 per cent to over $8 billion in the first nine months of the 2010/11 fiscal year, and in March a record $1.05 billion was received, according to data from the State Bank of Pakistan. But money from the diaspora is fickle and mysterious. “Why on earth would remittances grow by 23 or 24 per cent? What is happening around the world?” asked Ashfaque Hasan Khan, Director General at Nust Business School in Islamabad, in regards to the global slowdown in economic activity. Stroem from ADB said, “Remittances are some of the more fascinating things in Pakistan, none of us really understand the whole picture on remittances.”

The more worrying factor for analysts is that repayments to the IMF start from 2012, which would put pressure on the foreign exchange reserves.

“This is something the Ministry of Finance is very concerned about and working out in terms of not having the foreign exchange reserves position of Pakistan weaken ... as it would move the exchange rate around quite a bit.”

Pakistan is a heavily indebted country, with its external debt amounting to about $58 billion and domestic debt six trillion rupees ($70 billion). Its debt-to-GDP ratio is around 61 per cent, breaching the limits of fiscal responsibility.

“This is a major concern and we really don't know what the game plan is for the government,” said Sayem Ali, economist at Standard Chartered Bank Ltd.

Most analysts said Pakistan would likely have to enter into a new IMF programme after the current one which ends in September.

“We have to go (into another IMF programme), we have no choice. ... If you ask us (Pakistan) to repay the IMF loan over the next two years and also generate revenue for the economy, then that would not be possible,” Siddiqui from Invest and Finance Securities said.

The IMF programme would also require the country to implement fiscal reforms to increase its tax-to-GDP ratio, which is currently around 10 per cent, one of the lowest in the world.

The IMF has stalled disbursement of the last two tranches for the current loan since May 2010 because of the government's inability to implement fiscal measures such as a reformed general sales tax.