SBP reserves drop by a whopping $1.7bn

KARACHI: The net foreign exchange reserves held by the State Bank of Pakistan (SBP) decreased by a whopping $1.712 billion to $10.362 billion, during the week ending May 29, 2020, according to data released by the central bank on Thursday.

This plunge of $1.712 billion in reserves is the largest-ever weekly drop recorded in a decade, according to some reports. It also brings the SBP net reserves down to the lowest level since the week ending December 6, 2019. 

Net foreign reserves held by commercial banks increased slightly, from $6.52 billion to $6.55 billion. 

The total liquid foreign reserves held by the country fell significantly from $18.597 billion in the week ending May 21, to $16.92 billion during the week under review.

The SBP stated that the decrease could be attributed to government external debt repayments of $1.669 billion, though it did not say if this repayment was part of general repayments to the IMF. 

Reserves have been steadily falling since the week ending April 30, mostly on account of external debt repayments, though none as large as the repayment of the week ending May 29. 

Pakistan’s external debt stands at Rs16.6 trillion, with external government debt making up Rs11.6 trillion, and non-government external debt at Rs3.2 trillion, according to the latest data released by the SBP in May. The country’s debt from the IMF stands at  Rs1.07 trillion, a slight increase from the last quarter’s figure of Rs1.04 trillion.

According to SBP data, SBP net reserves hovered between the $7 billion and $8 billion region between April and October 2019.

However, starting in November 2019, SBP reserves crossed the $9 billion mark. Reserves were also helped by a $1.3 billion loan from the Asian Development Bank (ADB) in December 2019. Reserves then steadily increased to a peak of $12.8 billion in the first week of March 2020. 

But beginning mid-March, reserves began to decline. SBP reserves fell from $12.8 billion to $10.8 billion between March 13 and April 17. 

(To clarify, there was some brief respite in the middle: SBP reserves had momentarily risen by $252 million to $10.974 billion during the week ending April 10, 2020. This was the first time reserves had risen since March 13.)

However, in the week ending April 24, SBP reserves got some significant help from the IMF, jumping from $10.889 billion to $12.070 billion. This can be mainly attributed to the $1.39 billion received from the IMF under the Rapid Financing Instrument (RFI), to address the economic impact of the Covid-19 shock.

Reserves also rose in the week ending April 30, increasing by $259 million to $12.329 billion. At the time, the SBP did not cite a reason for the increase.

However, since then, SBP reserves fell over the course of May, to $12.073.9 billion during the week ending May 21, 2020. The SBP attributed the declines to external debt repayments. 

SBP Governor Reza Baqir has taken a somewhat optimistic view of the reserves trend. In a webinar yesterday, he said that Pakistan’s net reserves had significantly improved since 2018, where they stood at nearly zero, but have since recovered by nearly $10 billion. 

Others are not as optimistic: the combined pressure of a fall in exports and remittances due to the Covid-19 pandemic, and a rise in external debt repayments like those of May, may see the net SBP reserves fall to below double digits later this year. 

FX reserves are an important macroeconomic indicator used to assess the health of an economy. Pakistan’s net reserves are mostly built up by foreign loans. With insufficient inflow of foreign currency from exports and remittances, the same reserves need to be used to pay back loans. The same reserves are also used to control the exchange rate as well. Low FX reserves worry the SBP and the government because it reduces their ability to manage the exchange rate and in a worst-case scenario, become unable to fulfil its debt obligations, in other words, default.