Pakistan's economy tanking: Dwindling reserves threatening economy
Dwindling reserves threatening economy
By Khaleeq Kiani
ISLAMABAD, Nov 8: With higher imports and slowing down privatisation, the foreign exchange reserves have started to deplete alarmingly and could cover just three to four months of imports from about nine-month coverage two years back, Dawn has learnt.
The latest estimates put total foreign exchange reserves at about $12.4 billion, of which $10.2 billion are currently held by the State Bank. After accounting for more than $1.2 billion liabilities and selling of dollars in the futures market by the central bank, net foreign exchange reserves stand close to $8.5 billion.
This means that the country’s reserves can cover about 3-4 months of import bill - a situation better only than last few months of the Nawaz Sharif government when reserves were enough just for few weeks of imports, a senior executive of a foreign bank told Dawn.
This is despite the government’s policy statements over the last year that it would maintain reserves to cover at least six months of imports at all times.
Pakistan’s imports in the first quarter of the current year have amounted to about $7.43 billion, averaging at around $2.48 per month, which is much higher than last year’s monthly average imports of about $2.38 billion. The trade deficit at the current rate of about $1.054 billion per month was also likely to cross $12.7 billion and put an additional burden of about $600 million by end of the year.
Sources in the lending agencies said the Asian Development Bank and the World Bank have been pointing out the declining trend in the foreign exchange situation and advising the government to put in place fall back arrangements and avoid overvaluation of the local currency.
The World Bank, said these sources, asked the government recently to pursue "an appropriate exchange rate policy that will avoid overvaluation of the currency".
Compared with this situation, these sources said, the foreign exchange reserves were increasing about two years back, at the same time prepaying high cost loans through creation of a sinking fund of about $1.2 billion that led to prepayment of about $1.18 billion debt to the ADB. At one time, the reserves had reached $13 billion, enough for more than nine months of imports and that too after prepayment of loans.
These sources said Pakistan has started to rely heavily on foreign direct investment (FDI) but this source under the exchange rules can go anywhere at any time, whether it is in the equity or the capital market.
“What the government can do in case the FDI starts to go back to its original destination because it would then put big pressure on the exchange rate of rupee and the level of reserves would drastically come down,” said a source at a multilateral agency.
A major part of the FDI during the last 15 months or so has been through the privatisation process, instead of asset creation that may not be available in the days ahead.
On top of that, the repatriation of dividends would put additional burden on foreign exchange reserves, the source said, adding the privatisation of PTCL alone has increased profit repatriation by about $210 million. This meant that total flight of foreign exchange in the shape of dividends would touch about $800 million by end of this year.
Already, he said, an arbitrage has been created in favour of the dollar owing to increase in interest rates by the State Bank of Pakistan and a foreigner could gain about seven per cent just by selling dollar in the local market and then by buying it back because of a stagnation in the value of rupee over the years.
The ADB told the government recently in writing that “the heavy reliance on these non-recurrent and sometimes volatile inflows (US payments for logistic support, privatisation and foreign investment in equities) is a major issue for sustaining such high levels of both imports and the current account deficit, highlighting the government’s need to strengthen the underlying fundamentals of the balance of payments.
Last year, the US provided over $1.1 billion to Pakistan for logistic support which may not be available in the longer run. Another $1.5 billion was borrowed through Sukuk and Eurobonds last year and $3.3 billion through selling of the state assets.
“Other worrying features were that the current account deficit rose so strongly, despite receipts of $1.1 billion from the United States for logistics support; and that one third of current account deficit financing was non-recurrent, and related to inflows from privatisations and foreign investment in equities,” the ADB said.
According to the ADB, the burgeoning current account deficit, continuing high inflation, and latent power shortages are potential risks to the country’s medium-term economic prospects. Moreover, additions to the pro-poor measures already announced in the FY2007 budget may, in the lead up to the 2007 general elections, further weaken the budgetary position in the coming year.
ISLAMABAD, Nov 8: With higher imports and slowing down privatisation, the foreign exchange reserves have started to deplete alarmingly and could cover just three to four months of imports from about nine-month coverage two years back, Dawn has learnt.
The latest estimates put total foreign exchange reserves at about $12.4 billion, of which $10.2 billion are currently held by the State Bank. After accounting for more than $1.2 billion liabilities and selling of dollars in the futures market by the central bank, net foreign exchange reserves stand close to $8.5 billion.
This means that the country’s reserves can cover about 3-4 months of import bill - a situation better only than last few months of the Nawaz Sharif government when reserves were enough just for few weeks of imports, a senior executive of a foreign bank told Dawn.
This is despite the government’s policy statements over the last year that it would maintain reserves to cover at least six months of imports at all times.
Pakistan’s imports in the first quarter of the current year have amounted to about $7.43 billion, averaging at around $2.48 per month, which is much higher than last year’s monthly average imports of about $2.38 billion. The trade deficit at the current rate of about $1.054 billion per month was also likely to cross $12.7 billion and put an additional burden of about $600 million by end of the year.
Sources in the lending agencies said the Asian Development Bank and the World Bank have been pointing out the declining trend in the foreign exchange situation and advising the government to put in place fall back arrangements and avoid overvaluation of the local currency.
The World Bank, said these sources, asked the government recently to pursue "an appropriate exchange rate policy that will avoid overvaluation of the currency".
Compared with this situation, these sources said, the foreign exchange reserves were increasing about two years back, at the same time prepaying high cost loans through creation of a sinking fund of about $1.2 billion that led to prepayment of about $1.18 billion debt to the ADB. At one time, the reserves had reached $13 billion, enough for more than nine months of imports and that too after prepayment of loans.
These sources said Pakistan has started to rely heavily on foreign direct investment (FDI) but this source under the exchange rules can go anywhere at any time, whether it is in the equity or the capital market.
“What the government can do in case the FDI starts to go back to its original destination because it would then put big pressure on the exchange rate of rupee and the level of reserves would drastically come down,” said a source at a multilateral agency.
A major part of the FDI during the last 15 months or so has been through the privatisation process, instead of asset creation that may not be available in the days ahead.
On top of that, the repatriation of dividends would put additional burden on foreign exchange reserves, the source said, adding the privatisation of PTCL alone has increased profit repatriation by about $210 million. This meant that total flight of foreign exchange in the shape of dividends would touch about $800 million by end of this year.
Already, he said, an arbitrage has been created in favour of the dollar owing to increase in interest rates by the State Bank of Pakistan and a foreigner could gain about seven per cent just by selling dollar in the local market and then by buying it back because of a stagnation in the value of rupee over the years.
The ADB told the government recently in writing that “the heavy reliance on these non-recurrent and sometimes volatile inflows (US payments for logistic support, privatisation and foreign investment in equities) is a major issue for sustaining such high levels of both imports and the current account deficit, highlighting the government’s need to strengthen the underlying fundamentals of the balance of payments.
Last year, the US provided over $1.1 billion to Pakistan for logistic support which may not be available in the longer run. Another $1.5 billion was borrowed through Sukuk and Eurobonds last year and $3.3 billion through selling of the state assets.
“Other worrying features were that the current account deficit rose so strongly, despite receipts of $1.1 billion from the United States for logistics support; and that one third of current account deficit financing was non-recurrent, and related to inflows from privatisations and foreign investment in equities,” the ADB said.
According to the ADB, the burgeoning current account deficit, continuing high inflation, and latent power shortages are potential risks to the country’s medium-term economic prospects. Moreover, additions to the pro-poor measures already announced in the FY2007 budget may, in the lead up to the 2007 general elections, further weaken the budgetary position in the coming year.
posted by India News Watch at 8:09 PM
<< Home