ISLAMABAD: Finance Minister Ishaq Dar on Wednesday informed Prime Minister (PM) Nawaz Sharif that Pakistan's foreign exchange reserves have reached a record high of $21 billion, a PM Office statement said.

During his meeting with Nawaz, Dar said of the $21bn in foreign exchange reserves, $16bn are with the State Bank of Pakistan (SBP), while $5bn remain with commercial banks.

The finance minister said SBP's share has, during the last year, increased from $3bn to $16bn.

PM Nawaz lauded the performance of the economic team led by Dar, and observed that Pakistan is back on track with respect to economic growth. He said political stability had improved security in the country, and transparency in public sector governance had also resulted in growth.

Pakistan is on the irreversible path of economic development due to investments in energy and infrastructure, Nawaz said.

US Dollar rising despite high reserves

Currency experts believe that higher reserves, particularly of the State Bank, help stabilise the exchange rate. Low SBP reserves invite speculation which directly hits the local currency, as witnessed in the recent past.

The dollar, however, remained above Rs107 in the open market for most of last week, despite a warning earlier this month by the finance ministry and the State Bank to sell it at Rs106.20.

Currency dealers said the dollar is under pressure because of higher demand from travellers in the holiday season.

Representatives of exchange companies, in a meeting with Dar and SBP Governor Ashraf Wathra, were warned of the serious consequences if the rates were not brought down. They were asked to cut the dollar value by Rs2 to Rs105. The threat worked temporarily and the greenback dipped to around Rs106.

SBP has been supplying dollars to the open market to meet the demand but the rate is still going up in both the open and inter-bank markets.

It is surprising for many that the exchange rate is still vulnerable despite supply of dollars from the State Bank and the $21bn foreign exchange reserves.

Analysts say the biggest reason is the dollar itself which appeared as the single most trusted global currency.

Almost all international currencies depreciated against the US dollar since the beginning of the current fiscal year, including the euro, the pound and the yuan. A recent fall in the Chinese currency adversely hit emerging markets and their currencies were depreciated significantly against the greenback.

'Rupee overvalued'

In case of Pakistan, some economists suggest that the rupee is overvalued by as high as 20 per cent. Exporters have the same argument as they ask the government to devalue the local currency that would help make exports cheaper. Pakistan’s exports have been declining faster this fiscal year compared to the preceding one.

Analysts and independent economists fear that the increasing debt servicing on foreign debts would put more pressure on the rupee. Repayment to the IMF and Paris Consortium loans would push debt servicing to around $10bn in the next two to three years.

Currency analysts say massive borrowing from foreign sources would not allow the exchange rate to stabilise and the local currency will continue to fall in the coming months and years.