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Business & Finance

Pakistan's net international reserves set to increase: SBP governor

  • Dr Reza Baqir says IMF's newly-approved SDR allocation could not have come at a better time for Pakistan that is in recovery mode
  • No alarm bells for Pakistan's economy, adds central bank chief
Published August 13, 2021
Pakistan's net international reserves set to increase: SBP governor

Dr Reza Baqir, governor of the State Bank of Pakistan (SBP), said on Friday that the revised Special Drawing Rights (SDR) of the International Monetary Fund (IMF) will help boost net international reserves, a key metric that takes into account reserve-related liabilities as well.

Net international reserves (stock) of the SBP are defined as the dollar value of the difference between usable gross international reserve assets and reserve-related liabilities, evaluated at the program exchange rates, according to the IMF.

Baqir, addressing a press conference in Islamabad, said the newly-approved SDR allocation of the IMF could not have come at a better time for Pakistan that is seeking higher economic growth in the ongoing fiscal year.

"The import cover will also increase with this new allocation," said Baqir, adding that foreign exchange reserves will reach a historic high with the new SDR allocation.

While Pakistan's stock of foreign exchange reserves is over $24.6 billion, those held by the central bank are at a little over $17.6 billion, according to the latest data. External debt repayments and Covid-19 vaccine procurement were cited as reasons for the weekly fall in foreign exchange reserves, said the SBP on Thursday.

Pakistan's foreign exchange reserves fall to $24.644 billion

The level of reserves is an important figure for Pakistan, which needs the dollar-stock to pay for imports. With the government seeking higher economic growth, pressure on dollar reserves is likely to increase. This leads to a higher current account deficit that eventually erodes SBP-held foreign exchange reserves.

The current account deficit has been widening in recent months, putting pressure on the currency as well.

Baqir, however, said the current account deficit is projected to stay between 2-3% of GDP this fiscal year, which is manageable.

"This is a different case," said the SBP governor. "The current account deficit was at 6% of GDP back in 2016 when this problem happened.

"However, this time around - like SBP said in its monetary policy announcement - the current account deficit is projected to stay between 2-3% for this fiscal year. This is what happens in emerging markets that are targeting growth."

Baqir added that none of the 'three alarm bells' is ringing in Pakistan's case.

"The level of the current account deficit is not at the level where things become unsustainable. Secondly, the exchange rate is adjusting with the increasing deficit. The market naturally adjusts when outflow is greater than inflow (of foreign currency).

"Had the exchange rate not been adjusting, then that is an alarm bell. But the rate is adjusting.

"Thirdly, the (foreign currency) reserves are increasing. In the past, they decreased. At present, none of these three alarm bells is ringing. Reserves are increasing, the market-based exchange rate is adjusting both ways.

"In the broader context, if we are talking about the current account deficit, then this is a good sign. We aren't talking about a recession, which we used to discuss two years ago."

Pakistan registered its first recession in over seven decades in the fiscal year that ended June 2020, followed by a growth of 3.94% in the very next fiscal year (2020-21).

Baqir said this year the SBP sees a growth of 4-5%.

Pakistan set to receive $2.77 billion from IMF on Aug 23, says Tarin

Background of new IMF allocation

On Thursday, Finance Minister Shaukat Tarin said Pakistan is set to receive $2.77 billion from the IMF on August 23, confirming earlier reports that the Washington-based lender's increased lending capacity would boost the country's foreign exchange reserves.

The boost comes after the IMF board of governors greenlit increasing the institution's lending capacity by $650 billion, the last step in approving an initiative to boost aid to the most vulnerable countries.

The program, which had already been approved by the IMF's executive board in mid-July, will be implemented on August 23.

The newly issued SDRs will be allocated to member countries in proportion to their IMF quota. Emerging and developing nations are to receive around $275 billion in total with Pakistan set to get $2.77 billion.

What are SDRs

Created in 1969, SDRs are not a currency and have no material existence.

Their value is based on a basket of five major international currencies: the dollar, the euro, the pound, the renminbi or yuan and the yen.

Once issued, SDRs can be used either as a reserve currency that stabilises the value of a country's domestic currency, or converted into stronger currencies to finance investments.

For poorer countries, the interest is also to obtain hard currencies without having to pay substantial interest rates.

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