Outflows push forex reserves to 3-year low

KARACHI: Pakistan’s foreign exchange reserves fell to a three-year low of $13.5 billion during the week ended November 23, 2012 because of external debt obligations and high import payments, the central bank reported on Thursday.

The reserves held by the State Bank of Pakistan (SBP) also dropped below $9 billion, showing an adverse balance of payments position of the economy.

A latest breakup of the foreign reserves revealed that liquid foreign reserves slumped by $270 million to $13.575 billion while the central bank witnessed a drawdown of forex reserves by $382 million to $8.860 billion.

In the absence of bilateral and multilateral financing, the IMF loan repayments would lead to a sharp depletion of reserves, analysts said.

They said the reserves have fallen to an alarming level and are only sufficient to cover just less than three months of import and debt repayments.

The official international reserves will continue to come under pressure from continued loan repayments, they added.

The country’s balance of payments outlook remains precarious despite showing surplus in current account during the four months of the current fiscal year.

The sustainability factor in the current account surplus is likely to end November onwards, analysts observed.

“The decline in reserves impaired severely the country’s ability to meet its external obligations and, given a sluggish pace of foreign direct investment (FDI) along with uncertain prospect of foreign inflows, country’s reserves are likely to stay under pressure, facing further downturn in the remaining course of current fiscal year,” said Ahsan Mehanti, a senior analyst at Arif Habib Corporation.

“However, on the basis of assuming a robust growth in remittances from overseas workers, which may go up to $14 billion and improvement in portfolio flows at the local equity market, the balance of payments is likely to be at a comfortable level during the current fiscal year,” he said.

As on September 30, 2012, country’s foreign debts stood at $66.2 billion as on September 30, 2012 and trade deficit was at $6.44 billion in the four months of ongoing fiscal year. This casts a shadow over external sector outlook, as most of debt servicing obligations are due in this fiscal year.

Pakistan has paid the seventh installment worth $394.3 million to the IMF under its standby loan arrangement (SBA) facility last week. It has paid $2.522 billion to the IMF, since February 2012. The next installment of SDR258.4 million is due on February 26, 2013. The IMF and scheduled debt repayments are draining forex reserves and straining continuously Pak rupee.

According to a report, Pakistan’s buffer to external financial shocks or to a loss of domestic confidence in the rupee would be thin.

This fragility in the external payments position highlights Pakistan’s high reliance on multilateral or bilateral financing that has proven to be unstable over recent years.

Pakistan’s current account prospects for the fiscal year 2013 are unlikely to show an improvement, it said.

But with export growth in low single-digit and a contraction in import growth, it is too soon to see exports dipping back into the red or oil prices edging higher resulting in the current account deficit, the report predicted.

It warned while the external vulnerability indicators (EVI) were at a prudent of 32.3 percent in last fiscal year, it could climb rapidly if reserve hemorrhaging continues.

The external payments pose a serious downside risk to the local currency also as the local unit has depreciated by 0.6 percent against the US dollar during November.