Pakistan Reader# 522, 17 January 2023
On 13 January, the State Bank of Pakistan (SBP) said that the country’s foreign exchange reserve has dropped to USD 4.34 billion and has decreased by USD 1.23 billion during the week ending on 6 January because of “external debt repayments.” SBP’s impending foreign currency shortage has resulted in a serious dollar shortage, with the restrictions on imports of food and raw materials materialising as a serious concern. According to analysts, the amount that the country houses at the moment is deemed to be insufficient to cover a month of average imports and also sheds light on the inability of the government to bring raw materials at a lesser price, leading to further inflation in the economy. Pakistan’s forex reserves have been declining since the PML-N government came into power.
Why are the forex reserves declining?
1. Lack of accountable measures
Pakistan’s reserves have been in sharp decline since the beginning of 2022-23. The country’s high inflationary pricing and low industrial output lead to a squeeze in production and the unavailability of imported raw materials. Karachi Chamber of Commerce and Industry said that the banks held up the processing of payments amounting to nearly USD 1500 for the imports of spare parts, and has completely halted the supply chain of the country. The textile sector also said that textile factories are being “deprived” of necessary imported raw materials and that letters of credit as low as USD 5000 are being “refused.” The delay in import payments and remittances has barred people from indulging in profitable trade deals, despite Finance Minister Ishaq Dar saying that the reserves will “stabilise again very soon.”
2. Staggering exchange rate vis a vis the US dollar
On 12 January, the Pakistani Rupee (PKR) registered a downturn of PKR0.5 to hit a new three-month low of PKR 227.93 against the US dollar in the interbank market and fell by PKR 1 in the open market and reached PKR 238 against the dollar. Analysts said that the rupee had “partially recovered” in the black market and remarked that the decline in the rupee was losing value in the interbank market “for quite a long time” in the context of the likely renewal of IMF’s loan programme. The rupee landed a value of PKR 260-270 against the US dollar in the black market, with the government artificially overvaluing the currency in the market. Analysts also held that the PKR needs to be determined by the prevailing market forces to meet the IMF’s conditions in the loan programme. Open market currency holders said that they had to “maintain” the exchange rate at PKR 237 to one US dollar despite the incessant depreciation in the interbank.
3. External debt servicing and import financing
By the end of January 2022, the SBP had nearly USD16.160 billion in forex reserves that kept declining for most of the year. Dar’s claims of Saudi Arabia and China’s forthcoming loans to support the country’s reserves put Pakistan in a difficult position, as the ninth review of the IMF’s programme has not materialised as of yet and could hold these countries from investing in the country without the IMF’s tranche. The critically low level of the reserves leads to further fears that Pakistan may not be able to meet its external obligations for fiscal 2023, despite SBP’s reassurance that the country would be able to pay back the entire USD 23 billion in the current fiscal year. On 22 December, S&P Global slashed Pakistan’s long-term sovereign credit rating by one notch to “CCC+” from “B” to reflect the sustaining weakening of the country’s external, fiscal and economic metrics.
Kazim Alam, “Huge weekly outflow takes SBP reserves down to $4.3bn,” Dawn, 13 January 2023
“Rupee touches new 3-month low,” The Express Tribune, 12 January 2023
“SBP’s forex reserves plunge to 8-year low,” Dawn, 22 December 2022
Shahid Iqbal, “Reserves down 4.2pc; rupee gains,” Dawn, 2 December 2022
“Declining reserves,” Dawn, 10 December 2022