December 5, 2019 (MLN): Foreign reserves, being a good financial indicator of the strength and solvability of an economy to meet its import receipts and external debt repayment, started to take a new path in FY20. Beginning at that date, forex reserves held by State Bank of Pakistan increased to $8.68 billion and foreign reserves of the commercial bank were recorded at $6.89 billion as of November 22, 2019.
During 27th Jun 2019 – 22nd Nov 2019, the foreign reserves held by SBP grew substantially by 19.38% from $7.27 billion as a result of the strengthening of PKR against the greenback by 5.33% from PKR 164. Improvement in external account position and the IMF first tranche of $6 billion loans also came as a respite for reserves building and financing the external debt servicing.
It is worth highlighting that the FX reserves held by commercial banks show a different picture as they depleted by 3.83% from $7.17 billion despite the appreciation of PKR against USD.
On the contrary, when the currency was depreciated by over 32% during 28th Sept 2018 – 27th Jun 2019, commercial bank foreign reserves surged by 10.57% to stand at $7170 million, exhibiting in the graph below.
It is seen that people are indisposed to convert their savings into USD to avoid the unfavourable impact of PKR appreciation. However, in times of devaluation of the rupee, people convert their saving into the greenback to get incentives by higher dollar rates.
Not only has this, but the Foreign Exchange Regulation Act also been affecting the commercial banks’ forex reserves. The SBP’s EPD Circular Letter No. 5, issued on April 12, 2018, says “provided that no cash shall be deposited in an account of a citizen of Pakistan resident in Pakistan unless the account holder is a filer as defined in Income Tax Ordinance, 2001”.
It is evident that this circular has put restrictions for non-filers Pakistani residents to deal in foreign currency accounts, here, we pay a big opportunity cost in terms of continuous falling of forex reserves held by commercial banks. However, the decision was in line with the Protection of Economic Reforms (Amendment) Ordinance 2018. It is the high time to ponder where this trend goes and how FX reserves of commercial banks can be accumulated.
Going forward, the improvement in the balance of payment, policy adjustment and currency flexibility have helped in upgrading the economic outlook of Pakistan from negative to stable by Moody’s which may help to attract foreign direct and portfolio investment in the country. Though, Moody’s revealed that weakening fiscal strength with higher debt levels and lower FX reserve buffers are the results of currency depreciation.
Pakistan needs to focus to build up reserves on the sustainable level through the channel of workers’ remittances, foreign direct and portfolio investment rather going to resort to the usual external and commercial borrowing through Sukuk or IMF. Pakistan will surely be a net gainer in terms of cost-benefit analysis if it looks for a sustainable approach to building forex reserves.
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