The foreign exchange reserves of the State Bank of Pakistan (SBP) added $84 million, thereby increasing the total to $11.26 billion, as revealed in data issued by the central bank on Thursday. The weekly increase posted a 0.75% gain from last week’s summary total at $11.17 billion, presenting a positive move for the country’s central bank against the international economic pressures.
While Pakistan’s total foreign exchange reserves only marginally increased to $15.97 billion, up from $15.94 billion the week before by $33.7 million, its central bank’s own foreign exchange reserves increased more meaningfully. Increasing by $128.6 million to $11.49 billion, the increase in the SBP’s reserves now stands at $12.7 billion, which, at 0.87 percent increase, is also the highest in the past six weeks.
However, the net reserves in the commercial banks continued their slide, down by $50.3 million in the week, amounting to $4.71 billion, a decline of 1.06 percent. The decline in the net reserves in commercial banks somewhat offset the cumulative increment in central bank reserves, reflecting the delicate balance that the country currently passes through in managing its external accounts.
Reserve change drivers
While the SBP made no specific announcement about the forces behind changes in reserves during the week, market analysts may point to a number of reasons.
The uptick may be attributed to inflows from multilateral institutions, remittances, or even export receipts. At current, foreign exchange reserves in Pakistan become sensitive to micro-flows in and out of the country because the nation is servicing international obligations and financing imports.
The economic analysts note that stabilization of exchange rate and reduced non-essential imports have indeed controlled the dollar outflow but building up the reserve in the future would largely depend on continued international funding through FDI and across the financial institutions inflows which is highly unlikely without unprecedented fiscal reforms.
Fiscal Year-to-Date Growth in SBP Reserves
These data emphasize a positive trend in Pakistan’s reserves during the current fiscal year. As recorded with SBP, reserves have enhanced $1.87 billion since the start of the fiscal year, showing an extraordinary growth of 19.91%.
The increase in the reserves might partly be the result of efforts by the government to enforce strict import controls, attract international financing, and strengthen exports.
Miraculously, this year’s fiscal year differs significantly from last year’s performance in which reserves continued to be under considerable strain due to economically caused disturbances, increasing energy import prices, and debt repayments on external debt.
Pakistan’s economic policymakers are fully aware that building a cushion or buffer of foreign reserves will be directly proportional to their ability to service debt obligations and sustain essential imports, particularly energy, in the country.
If viewed in terms of the calendar year, SBP reserves have increased by $3.04 billion over a period of 36.95%. So far, the rising trend has been a positive signal against very challenging global economic conditions and has marked some level of resilience in Pakistan’s management of the external account.
However, that’s just not enough for the problems Pakistan still faces, including high inflation rates, currency volatility, and the need to structure quite elementary structural economic reforms to stabilize the broader economy.
The reserves of the SBP stood at $11.26 billion with an increase of $84m whereas, in contrast, the commercial banks have witnessed a decline in their holdings. In total, therefore, liquid foreign reserves increase just marginally on account of this offset between central bank and commercial bank reserves.
Economic analysts feel that though the build-up of the reserves is satisfactory, it should not be forgotten that the foreign exchange scene for Pakistan is volatile. External financing and erratic exchange rates continue to make Pakistan vulnerable to external disturbances.
Says Dr Asad Khan, an old economic analyst: “Pakistan’s reserve position is fragile. The improvement in the current rise is a positive step, but the solution that shall last long-term is sustainable economic reforms that reduce their dependency on debt.”
Although the efforts of the SBP to stabilize the exchange rate as well as in managing inflation have contributed in a small way to a balanced reserve position, the reserve growth of Pakistan largely depends on foreign inflows, that is, through remittances and international lending, with little coming from net exports.
It is the multi-pronged economic strategy by experts that would help the country achieve a stable and sustainable reserves position. The main essential area is strengthening the industrial sector with a policy mix that reduces trade imbalances and stimulates an environment friendly to foreign investment.
For all this, political stability, which in turn will instill investor confidence, would be necessary to encourage FDI along with other foreign inflows. Moreover, through strong policy reforms, it would be significant to reduce dependency on such external borrowings in the future to support economic growth in the long run.