Decline in forex reserves

Noted economist Dr Hafiz Pasha, who has held several ministerial portfolios in three governments, has pointed out that foreign exchange reserves have declined by 750 million dollars during November-December 2016. The critical question, therefore, is whether this fall reflects a seasonal dip which would automatically correct itself in subsequent months or whether it reflects a trend that may worsen in months to come?
The State Bank of Pakistan (SBP) quarterly report (July-September) 2016 contains an answer to this query. Total external inflows in the first three months of the current year, as per the SBP, reveal that net inflows from two multilateral sources - that provide limited subsidised credit and loans at the market rate but whose amortisation period is from medium- to long-term, notably 10 years to 30 years - was negative. Thus the largest net outflow in the first quarter of the current year (or negative inflow) was from Asian Development Bank to the tune of 121.1 million dollars, a rise from the negative 107.3 million dollars net inflows for 2015-16. This was followed by negative net inflows from the International Bank for Reconstruction and Development (IBRD), an arm of the World Bank with credit worthiness an eligibility criteria, of negative 53.2 million dollars. And surprisingly there was a negative inflow from International Development Assistance (IDA), another arm of the World Bank that provides assistance to the world's poorest countries, of negative 96.4 million dollars. Pakistan is eligible for both IDA and IBRD assistance as we are defined as a blend country.
Islamic Development Bank (IDB) was the only multilateral that accounted for positive inflows of 279 million dollars during the first quarter, a rise reflecting a marked increase in gross inflows (borrowing) from this source - from a total inflow of 39.7 million dollars in 2015-16 (inclusive of 51.7 million dollars of gross inflows) to 404.8 gross inflows during July-September 2016. However, disturbingly, this loan was procured for a short-term and not long-term. Clearly, the Sharif administration has upped borrowing from IDB as other multilateral sources have dried up which would, no doubt, increase the country's indebtedness in the short-term.
What about inflows under the China Pakistan Economic Corridor (CPEC), which is regarded as a game changer for Pakistan? In the first quarter, net inflows under the CPEC were 279.1 million dollars, just enough to paper over the net outflows during the period estimated at 270.6 million dollars but not enough to meet the current account deficit with exports, remittances and foreign direct investment declining. Additionally, the government has budgeted only 130 billion rupees for the CPEC in the current year and there are serious concerns that this amount is likely to considerably slow down the pace of its implementation.
So what did the Ishaq Dar-led Finance Ministry rely on to meet its foreign exchange requirements and show a healthy foreign exchange reserve position? Borrowing at an unprecedentedly high level from foreign commercial banks which, one would assume lend at a higher rate of interest than IDB with a shorter amortisation period. Data released by the SBP in this regard is particularly distressing as it reveals that this reliance did not surface during the first three months of the current year though it considerably increased during this period. Thus during the entire year, 2015-16, the gross inflows from foreign commercial banks were 513.3 million dollars with outflows estimated at 207.7 million dollars, giving a net inflow of 305.5 million dollars. In just the first three months of the current year, gross inflows from this source was 900 million dollars, outflows at 276 million dollars and net inflows at 624 million dollars.
The foregoing indicates that while total net inflows have been estimated at 794.6 million dollars (the bulk clearly from borrowing from foreign commercial banks) for July-September yet this situation is unlikely to be sustained. Thus one may well assume that loans from commercial banks and short-term credit from IDB became due accounting for the more recent data of negative 750 million dollars in our reserves indicated by Dr Pasha. In short, it is not a seasonable decline but a decline that must raise the hackles of the government.
It is unfortunate that the Finance Ministry continues to express satisfaction with its seriously flawed policies and one can only hope that the Sharif administration begins to reverse this policy that is heavily reliant on borrowings from foreign commercial banks.