The foreign exchange reserves of Pakistan’s central bank witnessed a notable decline of 2.7% in a week, reaching $4.19 billion, according to data released by the State Bank of Pakistan (SBP) on Thursday. This article aims to delve into the factors behind this decline, examine the implications it carries for the country, and shed light on the outlook for Pakistan’s foreign currency reserves.
1. Decrease in Foreign Exchange Reserves and its Causes
The State Bank of Pakistan reported that as of May 19, 2023, the foreign currency reserves of the SBP totaled $4,193 million, reflecting a decrease of $119 million in comparison to the previous week’s $4,311.9 million. The central bank attributes this decline primarily to external debt repayments, which have put pressure on the available reserves.
2. The Broader Picture: Liquid Foreign Currency Reserves
Taking into account the overall foreign currency reserves held by the country, including the net reserves held by banks other than the SBP, the total stood at $9,731.1 million. Among these reserves, the net reserves held by banks accounted for $5,538.1 million, highlighting their significant role in the country’s foreign exchange stability.
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3. Outlook for Pakistan’s Foreign Exchange Reserves
Fahad Rauf, the Head of Research at Ismail Iqbal Securities, emphasizes that the trajectory of Pakistan’s foreign currency reserves relies heavily on two key factors. Firstly, any substantial improvement in these reserves hinges on the revival of the International Monetary Fund’s (IMF) loan program. Secondly, the inflow of fresh financing from other multilateral and bilateral creditors plays a crucial role in bolstering the reserves.
Rauf further anticipates that the foreign exchange reserves are projected to rise to approximately $7-8 billion by the end of the current fiscal year, specifically by June 30, 2023. The realization of this projection largely depends on the successful execution of the IMF’s loan program and the inflow of additional financing from other international creditors.
Conclusion: Navigating the Path to Strengthening Foreign Exchange Reserves
As Pakistan’s foreign exchange reserves experience a decline primarily due to external debt repayments, it becomes crucial for the country to explore avenues to bolster these reserves. The revival of the IMF’s loan program and the infusion of fresh financing from other multilateral and bilateral sources emerge as key determinants for the trajectory of Pakistan’s foreign currency reserves.
The future outlook appears cautiously optimistic, with projected growth in the reserves expected by the end of the current fiscal year. However, it is imperative for the country’s financial authorities to actively engage in efforts aimed at attracting and securing substantial financial support to strengthen Pakistan’s foreign exchange reserves and ensure greater stability in its economy.
