Pakistan’s foreign exchange reserves reached $12.75 billion at the end of February, their highest level in 27 months, according to data released on Thursday by the State Bank of Pakistan.
The last time Pakistan’s central bank had this many dollars was in November 2017. Since coming into power in August 2018, the Imran Khan-led PTI government had been facing a balance of payment crisis because of depleting foreign exchange reserves.
For every dollar earned, the country was spending two, which led to a negative balance of payment. As a result, the government’s dollar reserves have been falling, making it difficult for the government to sustain essential imports like oil and machinery and repay its foreign loans. On January 18, 2019, the SBP’s dollar reserves fell to $6.6 billion, the lowest level in the preceding five years and barely enough to sustain two months of import payments. If it didn’t improve its dollar reserves, it would default on its foreign payments.
However, the cricketer-turned politician started visiting friendly countries shortly after his election as prime minister to secure aid. The country was able get more than $10 billion from Saudi Arabia, Qatar, and China, including an oil credit of $3 billion per year from the Saudis.
However, that wasn’t enough so in July the government entered an agreement with International Monetary Fund to avoid a default. The $6 billion bailout programme will cost the country $180 million in interest payments to be paid in three years.
However, the IMF programme opened the doors to multilateral donors such as the Asian Development Bank and World Bank that also provided support to the country’s dollar reserves, including financing the fiscal deficit.
The inflow of dollars also helped stabilise the exchange rate. The dollar has been trading at around Rs155 since August 2019, a stark contrast to the preceding year when it rose 25%.
Former finance minister Ishaq Dar had used the country’s dollars to control the exchange rate, so while it was lower a few years ago, Pakistan was spending a lot of money to keep it that way.
Another major contributor to the rising dollar reserves was the inflow of hot money in Pakistan’s short-term debt instruments. Foreigners have bought more than $3 billion worth of the government’s treasury bills since July 2019. This is because they were getting a 13% return (in rupee terms), which is much higher than what they would get from American and European markets even after adjusting for currency conversion loss.
For now, the country has been able to reduce its current account deficit by 76%. However, some analysts warned of risks in the medium term as these short-term loans need to be paid back in one year along with a profit, which would reverse the flow of dollars and may bring the country back to where it was a year-and-a-half ago. To avoid a balance of payment crisis again, the country needs to increase its exports, they say.