Pakistan’s declining Foreign Reserves: Reasons and Implications | MG Opinion

November 14, 2018 (MLN): Pakistan’s foreign reserves have declined to $14.06 bln in the month of October, as divulged in a recent statistics by SBP.

With foreign reserves declining continuously in the last year, it can be anticipated that the currency will depreciate further in coming days, as during the last week it recorded a depreciation of 1.02% or Rs.1.35. The consumers will experience a further hike in prices which will affect their domestic demand and consumption pattern.

As per some economic analysts, one of the reason of declining Pakistan’s foreign reserves is the Free Trade Agreement (FTA) signed with an export juggernaut like China. After signing FTA, imports from china skyrocketed and trade deficit broadened.

Source: SBP staff notes

Other reasons that are responsible for declining foreign reserves include debt servicing and other official payments.

Foreign exchange reserves have clear implications on exchange rate stability, financial markets, inflation, international trade and hence, on overall economic activity.

Pakistan’s foreign reserves have witnessed a declining trend in the last couple of months, exerting pressure on rupee to devalue against the US dollar.

Source: MG Link

The figure indicates that the fluctuations in the total reserves of the country reflects in official exchange rate and in international trade. In the last two months foreign reserves have further declined causing rupee to depreciate by 6.58% and trade deficit has enlarged by 8.73% in a month of October 2018 as compared to the previous month.

However, this situation is expected to be reversed on the back of international loans from China and Saudi Arabia.

Finance Minister Asad Umar said that the government is currently working on all options including an agreement with International Monetary Fund, in addition to bilateral borrowings from China and Saudi Arabia.

However, the Chinese government has not yielded anything concrete so far regarding a loan package, but the analysts are expecting a big loan from China on the back of Prime Minister’s successful visit to China.

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