ISLAMABAD: Pakistan’s forex reserves saw a spike this week, with the rupee slightly recovering but external balances continuing under stress. However, no major international assistance is in sight.
The official forex reserves continued to drop to $4.688 according to State Bank of Pakistan (SBP), the central bank until last week. It is lower than two months’ import requirements. During the week that ended Sept. 27, the reserves declined by $721.2 million due to a rise in oil and other imports. But reserves held by the commercial banks, on the other hand, rose to $3.45 billion. The two put together are $8.11 billion. The overall liquid forex reserves held by the SBP were $16.5 in Oct. 2007. The amount included $13.80 held by the SBP and $2.27 billion held by the commercial banks. The reserves started receiving a big hit soon after, as prices of imported oil, food, and commodities soared. But the reserves saw a spike in the week ended Oct. 4 and SPB said its own reserves rose to $4.87 billion from last week’s $4.68 billion in the previous week.
There was no change in the reserves held by commercial banks which stayed at $3.450 billion. The main reason for the spike was receipt of a $500 million loan to help Pakistan to counter the impact of high fuel and food imports.
The central bank injected $100 million into the market to stop the rupee’s depreciation. But the market reports that the actual amount could have been $200 million, inclusive of $50 million injected by the commercial banks on SBP’s urging.
SBP Governor announced this week that the central bank would provide greenbacks at Rs.80 to a dollar to banks and forex companies, which coupled with improvement in the reserves brought the dollar down to around Rs.79.15. At one point during the week the dollar stood at Rs.78.90.
ADB’s release of $500 million as assistance did help shore up the market outlook a good deal. “This is the frist installment of a $1.5 billion loan designed to support our economic development,” SBP spokesman said. The cash will top up Pakistan’s foreign currency reserves and help improve confidence in its depreciating currency. And it worked to boost the rupee. Before that the Rupee had lost 23 percent of its value against the dollar since Jan. 1 this year. But the government is now of the view that with a decline in the price of imported oil, the present inflow from ADB is “quote valuable” and so will be the impact of the potential availability of assistance for Muslim and Western countries, an International Financial Institutions (IFIs). This is despite the fact that the trade and current account deficits are widening. The Ministry of Finance (MoF) had projected a $14 billion current account deficit for the current fiscal 2009. Depending on the price of imported oil and food, and industrial inputs the amount may vary.
But so for, the depletion of forex reserves are impacting the domestic banking, squeezing banks’ liquidity and undermining their capacity to lend. This is particularly important because the cotton harvesting season that started on Oct. 1, requires a huge amount of credit disbursement for the cotton to move from farmers to ginners, middlemen and domestic textile mills which buy the fiber.
The cotton funding operation, which will last nearly six months involves funding of exports, too, if surplus cotton is available to be sold abroad. The liquidity crunch led overnight inter-bank lending rates to rise to a record high of 40 percent early in the week. But it declined to 27 percent after SBP intervention and injection of Rs.53 billion into the market a day later.
The key reason for this liquidity crunch is the decline in Pakistan’s forex reserves. It led to a decline in the net foreign assets of the banks to Rs.167 billion, compared to a Rs.24 billion decline at the same time last year. As a result, credit to the private business in the busy first quarter - July-September - of the fiscal 2009, has risen merely Rs.29.3 billion.
The liquidity is also being adversely affected as the government continues borrowing heavily from the central bank to meet its budgetary deficit. Its first quarter borrowing was Rs.173.2 billion, up from Rs.85.7 billion in the like quarter of 2008. This is despite the SBP warning to the government to stop borrowing more because it is adding to inflation. On the other hand, the government insists that it has to borrow from SBP in order to foot the bill for increased consumer subsidies on imported oil and food.
But, the week’s improvement in reserves, the SBP’s injection and dollar offers to the market, and aid inflow, turned the forex market operators upbeat.