Reserves see sharpest fall in years, drop by $627m

KARACHI: State Bank of Pakistan’s (SBP) reserves suffered one of their sharpest drops hitting its lowest level in four years following a decline of $627.7 million to $8.4 billion during the week ending Sept 28 due to external debt servicing, according to data released by SBP on Thursday.

The central bank’s reserves have seen a steep decline of $1.07bn during the first quarter of 2018-19. The SBP made similar high-volume payments during November and June 2017 worth $919m and $1.25bn, including a principal payment of $780m against Pakistan sovereign bond.

Economists and senior bankers have urged the government to take immediate action and make an announcement on already-delayed strategy to deal with the depleting foreign exchange reserves.

In March the country’s net reserves were reported as negative by the IMF. Today net reserves stand around negative $7.7bn, if one subtracts the pre-determined short term drains on foreign reserves given on the State Bank website from the total reserves figure released today.

State Bank says fall is due to debt service payment

Despite slight improvement in remittances and earnings from increase in exports during the first two months of current fiscal year, the ballooning trade deficit hampered the government’s ability to deal with the current account woes.

Chief Executive Officer at HBL Asset Management Farid Khan said that it is “a pretty alarming drop and what’s worrying is we don’t seem to have a strategy to tackle the situation.” The government has unveiled some measures for a fiscal adjustment, but thus far there is no concrete indication of how the drop in reserves is to be tackled. The government argues this remains a work in progress, and the finance minister has said in public remarks that he will have a concrete policy direction after October 10, approximately.

“The government needs to send signals that they are taking stock of the situation while there is still time, otherwise you are going to see open market premiums rising further and eventually leading to a dollarisation of the economy as people try hoard dollars,” says Farid Khan. He added that the market does not know what lies behind the steep drop, nor what the future repayment schedule might look like.

Another senior banker who did not wish to speak for attribution said that “some kind of volatility is to be expected, but this is quite large... the payments may be related to old Paris Club or some big chunk of a bilateral payment maturing.”

Fitch Solutions – research arm of Fitch ratings – warned that pressure is rising on the Pakistani rupee following the emerging market currency turmoil and rising oil prices. Furthermore, analysts warned that the rising pressures may push SBP to devalue currency for fifth time in a year.

The outflow in foreign exchange reserves is increasing pressure on the economy’s external front subsequently weakening the government’s negotiating position for borrowings.

Finance Minister Asad Umar said that the government is currently working on all options including an agreement with International Monetary Fund in addition to bilateral borrowings from China and Saudi Arabia. However, visits by Chinese and Saudi delegations have not yielded anything concrete thus far, whether a large loan package or deferred-payment deals on oil.

The delay by the government in announcing its policy direction to tackle with the worsening external crisis has perturbed the financial sector which is criticising the government’s inaction to deal with the situation.

Published in Dawn, October 5th, 2018