EDITORIAL: State Bank of Pakistan (SBP) purchased nearly 3.8 billion dollars from the domestic market July-October 2024 to shore up foreign exchange reserves. Interventions in the foreign exchange market are some of the useful tools employed by an apex bank to preserve or to strengthen/weaken the external value of the domestic currency.
Preservation of the external value of domestic currency is critical if the consumer price index (CPI) is highly susceptible to imported inflation. This is the case with Pakistan, given the country’s heavy reliance on imported fuel and cooking oil.
The steady decline in CPI from 28.3 percent in January 2024 to 12.6 percent in June last year to 2.4 percent in January this year is, to a large part, due to the stability of the external rupee value.
This stability will of course be challenged if the international price of the imported items rise, which is currently the case with respect to the rising oil prices due to the ongoing Russia-Ukraine and the Middle East conflicts.
Policy decision to strengthen the currency is triggered if reserves are lower than three months of imports as is the case with Pakistan. On 25 October 2024, foreign exchange reserves were 11.156 billion dollars which, as per the economic team leaders, were sufficient for only two-and-half-months of imports instead of the 3 months that are considered as international best practice.
While SBP’s purchase data is available till October 2024 yet it is worth noting that on 25 January 2025 reserves were only marginally up from the October figure at 11.372 billion dollars, which leads one to assume that the policy to borrow domestically is unlikely to have abated since October last year.
The Governor SBP recently gave the following figures: Total external borrowing required for the current year 26 billion dollars, total rollovers for one year by the three friendly countries 16 billion dollars with the remaining either already paid and the rest expected to be easily payable with existing reserves.
This does not include reliance of up to 4 billion dollars budgeted for this year from foreign commercial banks, raised by the Economic Affairs Division to 4.5 billion dollars.
With the one billion dollars procured by the government from two Middle Eastern banks as claimed by the Finance Minister while attending the Davos summit last month there is still a shortfall which no doubt necessitated foreign exchange purchases by the SBP.
It is important to note that weakening of a currency is a preferred policy option if the objective is to promote exports as it would make exports cheaper and hence more attractive for foreign buyers relative to buying from other competitor countries.
In Pakistan’s case, the rupee-dollar parity is critical for an additional reason: to lower the foreign debt servicing component of the budget, which was estimated at a whopping 1.038 trillion rupees for the current year, which does not include repatriation of profits by foreign companies that are contractually allowed to do so – a major cause of concern for Chinese Independent Power Producers in recent months.
In its defence the SBP may claim dollar purchases are a lot lower this year relative to the comparable period of the year before but this rationale does not take account of the fact that till June 2023 the International Monetary Fund (IMF) team had suspended the then ongoing programme after expressing severe concerns at the then Finance Minister’s policy to artificially strengthen the rupee that, in turn, led to multiple currency rates, thereby crippling remittance inflows through official channels by about 4 billion dollars as the hundi-hawala system was revitalised – a policy with which the SBP was complicit at the time.
Today the situation is different with the IMF again on board and hence focus should be on the fact that buying dollars is indicative of a fragile economy rather than a turn-around as claimed by the Cabinet members.
SBP in the ongoing Extended Fund Facility (EFF) programme acknowledged that “limited reserves buffers are a key constraint to external stability,” and pledged to “continue its objectives and efforts to build stronger FX reserves in line with the programme’s NIR (net international reserves) targets.”
Thus, while such purchases are almost certainly with the approval of the IMF yet one would have urged the government to limit purchases and borrowing to repayment of interest and principal as and when due and to desist from using external borrowings for meeting its own current expenditure. That sadly continues to this day.
Copyright Business Recorder, 2025
Comments