Lately the foreign exchange reserves have been witnessing a drop on a monthly average of almost $0.5 billion, creating difficult situation for the government to maintain a balance between cash inflow and outflow.
According to the latest published data from State Bank of Pakistan (SBP), the reserves have dropped to $21.15 billion now, which culminates into a total drop of almost $3 billion over the last six months.
Market sources say that one of the major reasons for the decrease in reserves is that private ventures instead of buying dollars from local banks and interbank markets, have resorted to taking loans. Thereby ensuring that foreign exchange reserves of the said commercial banks remain the same.
The other main highlights of the SBP report provided insight on the current state of the central bank’s reserves which have decreased by $366 million to $16.05 billion, reasons of which are external debt servicing and other official payments during the week ending on April 21.
The loss in the reserves of the central bank can be attributed to the rising current account deficit that has widened to $6.1 billion in the first nine months of the current fiscal year.
Currency exchange rates remain constant amidst country’s declining capacity to service foreign debt. However, the general sentiment of optimism remains present within the market which believes that the situation may get better within the next six months.
Insider analysis survey recently conducted by ‘Tresmark‘ a global terminal that tracks the worldwide currency market and trends, has showed that 70 % traders within banks and financial market expect the rupee to remain stable until the end of June.
Eman Khan of Tresmark talking with a local news outlet stated:
“We are expecting reserves to go up with fresh dollar-based sukuk issuance and with China willing to lend $750 million before the end of June. Even if we account for the expected foreign direct investment (FDI) over the next three years, the recurring deficit will still be there and most likely worsen as oil prices fluctuate globally. Similarly, solid initiatives or reforms to boost supply-side policies have been missing.”
On the topic of long term financial problems that can arise, Faisal Mamsa of Landmark Investment stated:
“Devaluation in the currency will not come without a cost as inflation will spike and might need to be tempered with higher interest rates. It will also adversely impact the performance of corporate (entities), especially state-owned enterprises (SOEs) that have taken dollar-based loans.”
The SBP report shows that reserves of commercial banks have remained unchanged around $5.1 billion since October 2016; however, the SBP itself has lost $2.9 billion in the same period.