External debt repayment against Pakistan Sukuk results in decline
The foreign exchange reserves held by the State Bank fell by 8.6% on a weekly basis, announced the central bank on Thursday.
On October 15, the foreign currency reserves held by the SBP were recorded at $17.4 billion, down $1.6 billion compared with $19.1billion on October 8.
The State Bank has said that reserves decreased mainly due to external debt repayments that included repayment of $1 billion against Pakistan International Sukuk.
According to experts on economy, imports are steadily increasing which is causing a decrease in foreign exchange reserves and mounting pressure on the rupee value in the currency market.
IN the end of August, the state bank received proceeds of IMF SDR allocation, amounting to $2.7 billion. After accounting for external debt payments, reserves increased by $2.5 billion to an all-time high of $20.1 billion.
On March 30, 2021, Pakistan borrowed $2.5 billion through Euro-bonds by offering lucrative interest rates to lenders aimed at building the foreign exchange reserves.
When the PTI government came to power, one of its biggest challenges was the country’s depleting dollar reserves. Within the first six months, the government saw dollar reserves drawing down to a level that was barely enough to pay for two months of imports.
To keep its position in the comfort zone, Pakistan was recommended to keep sufficient reserves to cover at least three months of import payments. The country, however, fell short when its reserves slipped below $6 billion in 2019 and was on the verge of a sovereign default.
To tackle this challenge, Prime Minister Imran Khan signed a $6 billion bailout agreement with the International Monetary Fund, which became a topic of national debate. After this, the country secured funding from multilateral donors such as the World Bank and Asian Development Bank. It helped Pakistan build its reserves.
Higher foreign exchange reserves are considered to help in stabilizing the dollar rate. An increase in reserves tends to stabilize the dollar rate, which means the rupee tends to become stable.