Pakistan’s dollar reserves drop to seven-month low

Pakistan’s dollar reserves fell to their lowest level in seven months after the central bank retired foreign debt of $244.5 million, the State Bank of Pakistan said on Thursday.

The foreign exchange reserves held as on June 19 were $9.9 billion. This is the first time since November 2019 that the dollars in the central bank’s coffers fell below $10 billion.

“During the week ended June 19, 2020, the SBP reserves decreased by $146 million,” the SBP said, attributing the decline to government external debt payments.

The SBP publishes weekly foreign exchange reserve data with a lag of a few days and the next weekly data may see its reserves shore up again because of fresh inflows in the current week.

During the current week, the SBP received around $1.7 billion, the bank said. This includes $725 million from the World Bank, $500 million from the Asian Development Bank and $500 million from Asian Infrastructure Investment Bank.

“These funds will be part of SBP weekly reserves data for June 26 to be released on July 2.”

Pakistan’s depleting dollar reserves were one of the main challenges for the present government when it came into power in August 2018. Within the first six months of its rule, the government saw the dollar reserves fall to the $6 billion level, barely enough to pay for two months of imports. The government took several steps to shore up these reserves to a comfortable level.

Prime Minister Imran Khan was able to secure aid and oil credit from friendly nations, but that wasn’t enough to plug a large current account deficit, the loss in the country’s dollar account. The deficit was due to our negative trade balance as for every dollar earned we spent two.

This deficit was unsustainable and pushed us to verge of a sovereign default, which was averted after PM Khan’s government signed a $6 billion bailout with the International Monetary Fund. The IMF programme opened more doors for Pakistan as the likes of the World Bank, ADB and AIIB also pledged support.

The government was able to double its dollar reserves from its lowest point in 2018 to $12 billion this year, but that came at the expense of choking our economic growth. Under the IMF programme, the government clamped down on imports and the central bank raised interest rates, making borrowing expensive for businesses and the government and applying the brakes on economic growth.

After these painful steps, the current account turned to surplus in October last year. In the first nine months of the current fiscal year, the loss to our dollar account was reduced by 73% and we were in profit or surplus in May, the latest month for which data is available.