SBP’s forex reserves to jump to $16bn by end FY21

ISLAMABAD: The liquid gross foreign exchange reserves held by the State Bank of Pakistan are expected to rise to over $16 billion by end of current fiscal year-2020-21, according to forecast by the Fitch Ratings.

The New York Based international credit rating agency in its recent report said that the central banks’ reserves rose to about US$12.5 billion by end-July from $7.7 billion a year prior.

A sharp reversal in March of record non-resident inflows to local-currency government notes (reaching a stock of $3.2 billion in February) generated exchange rate volatility and a modest decline in foreign-exchange reserves.

It said foreign holdings have stabilised since then, and reserves have been restored through multilateral and bilateral disbursements.

Furthermore, the report maintained that Pakistan's current account deficit narrowed to 1.1 percent of GDP in FY20 (2019-20), from a peak of 6.1 percent in FY18, due mainly to import compression and lower oil prices.

Fitch forecasts a slight widening of the current account deficit to 1.7 percent in FY21 due to a modest recovery in imports and declining remittances.

Remittances rose unexpectedly by 7.3 percent in fourth quarter of FY20, but we view this as temporary and expect a decline of about 10 percent in FY21 due to the impact of the global economic shock on Pakistan's overseas workers, the report added.

External financing requirements have declined, in line with the narrowing of the current account deficit.

However, the government's external debt repayments remain high at about $10.3 billion (about 80 percent of current gross liquid reserves) in FY21 and $8.9 billion in FY22.

Pakistan has received approval for its participation in the G-20's Debt Service Suspension Initiative (DSSI), which will lower FY21 debt repayments to bilateral creditors by roughly $2 billion.

The relief provided by bilateral creditors does not constitute a default under Fitch's definitions, and it is understood that the authorities have ruled out any request for participation by private creditors.

Access to external financing appears sufficient in the near-term to close any financing gap, underpinned by support from multilateral and bilateral creditors. In April, the International Monetary Fund (IMF) board approved $1.4 billion in financing through its Rapid Financing Instrument.

The 39-month, $6 billion IMF programme, which began in July 2019, remains in place.

The Fitch Ratings also forecast the fiscal deficit to remain roughly stable at 8.2 percent in FY21, due to the lingering impacts of the coronavirus shock.

Under the recently passed FY21 budget, the government targets a deficit of 7.0 percent, but, in Fitch's view, this target relies on optimistic revenue growth assumptions from ongoing administrative initiatives, as the budget does not contain new revenue raising measures.