Pakistan: Forex Exchange Reserves Drop Exponentially

Pakistan’s economic crisis is worsening with each passing day. As of the beginning of 2023, the foreign exchange crisis has deepened significantly. On January 6, the country’s forex reserves, held by the State Bank of Pakistan (SBP), dropped to a low of USD 4.343 billion, enough to cover only three weeks of imports.^[1] This decline was due to the repayment of USD 1 billion in commercial loans to two UAE-based banks. Additionally, remittances in the recently concluded six-month period of July-December 2022 were recorded at USD 14.1 billion, USD 1.7 billion less than in the same period last year (USD 15.8 billion).^[2] Moreover, the weekly food inflation has reportedly jumped by nearly 31 per cent compared to last year.^[3] All these factors have exacerbated daily hardships of people in Pakistan, who are struggling to survive without required food and energy resources. Importantly, the state authorities have completely failed to provide any immediate economic relief to the people besides borrowing more loans from international financial bodies and countries.

At the end of January 2022, the State Bank of Pakistan had USD 16.608 billion in forex reserves, which continued to decline throughout the year due to heavy external debt servicing and import financing.^[4] However, with the release of the last withheld tranche (USD 1.2 billion) of an ongoing USD 6 billion International Monetary Fund (IMF) loan, Pakistan is now hoping to receive billions of dollars in financial support from international financial institutions and friendly countries such as Saudi Arabia, China and the UAE.^[5] Additionally, Islamabad may also seek another loan from the IMF and request for the disbursement of the first tranche along with the withheld one. Lastly, Pakistan is expecting to receive billions of dollars in post-flood financial support from the international community.^[6]

Pakistan raised over USD 10 billion at a donors’ conference in Geneva on January 10 for the flood relief.^[7] Although, the Shehbaz Sharif government originally had demanded USD 16 billion from global donors for flood recovery purposes. Interestingly, 90 per cent of these financial ‘pledges’ (USD 8.7 billion) were project loans that will be rolled out over the next three years.^[8] Terms of these loans have not been revealed by the Pakistan government, raising serious doubts over its repayment in the given timeline, adding more financial burden on the country’s dwindling economy.

Therefore, it is difficult to predict exactly how many billions of dollars will flow into Pakistan in 2023. Some of the expected funding may arrive in the next few weeks or months, while other portions are due in three to five years.^[9] Additionally, Saudi Arabia has shown willingness to deposit another USD 2 billion with the State Bank of Pakistan, after conducting a “study”, bringing the total of its forex deposits with the SBP to USD 5 billion.^[10] The UAE is expected to provide USD 3 billion in financial assistance, including the rollover of its USD 2 billion forex deposits with the SBP.^[11] Saudi Arabia has also decided to extend USD 1 billion in oil on deferred payment, and China is likely to invest close to USD 9 billion in Pakistan’s economy through the “rollover of sovereign loans offered earlier,” refinancing Chinese commercial bank loans to Islamabad, and enlarging the bilateral currency swaps.^[12]

However, the expected forex inflows will only increase Pakistan’s outstanding external debt and increase its yearly debt servicing requirements. This means that if Pakistan fails to increase its exports of goods and services, reverse the declining trend in remittances and create an enabling environment for foreign investors, it will find itself trapped in foreign debt within a few years.^[13] Furthermore, the current economic situation in Pakistan is causing multifarious difficulties for many commercial sectors in the country as importers of raw materials and manufacturers are unable to clear import consignments and letters of credit due to delays in payments from banks. People are also unable to purchase enough dollars to cover their educational and medical expenses.

Addressing the passing-out ceremony of probationary officers of the Pakistan Administration Service (PAS) on January 14, Prime Minister Sharif said it was “shameful to have a nuclear weapon in one hand and a begging bowl in the other.”^[14] He stressed that seeking more loans for Pakistan made him feel ashamed and that turning to overseas lenders was the wrong course of action, given they needed to pay the money back. Expectedly, Sharif blamed Imran Khan’s Pakistan Tehreek-e-Insaf for wasting ‘crucial’ time by causing political disorder through street protests. Nevertheless, such political bickering will not help Sharif saving Pakistan from the impending default crisis.^[15]

The recurring economic crises in Pakistan are primarily caused by a persistent fiscal deficit, which is a result of the government’s tendency to overspend, neglect increase in domestic resources, and engage in excessive spending. However, the main reason of this problem is the sheer inaptitude of the political class and the unconstitutional involvement of the powerful military establishment in the country’s economic decision-making process.^[16] With the brewing political crisis and impending elections, the economic situation is likely to remain volatile in the coming months.

^[1] https://www.dawn.com/news/1731280

^[2] https://www.dawn.com/news/1731874/dropping-remittances

^[3] https://gulfnews.com/world/asia/pakistan/wheat-flour-bread-prices-skyrocket-as-food-inflation-grips-pakistan-1.93113443

^[4] https://www.dawn.com/news/1727705

^[5] https://www.reuters.com/world/asia-pacific/pakistan-take-fiscal-measures-set-by-imf-meet-budgetary-targets-2023-01-11/

^[6] https://www.voanews.com/a/pakistan-seeks-16-billion-to-recover-from-flood-disaster-/6910673.html

^[7] https://www.thenews.com.pk/print/1028927-geneva-conference-donors-pledge-over-105bn-for-pakistan

^[8] https://www.dawn.com/news/1731101

^[9] https://www.dawn.com/news/1730982/a-ray-of-light

^[10] https://english.alarabiya.net/News/saudi-arabia/2023/01/10/Saudi-Arabia-eyes-boosting-investment-in-Pakistan-to-over-10-billion

^[11] https://www.brecorder.com/news/40219837/uae-rolls-over-existing-2bn-loan-agrees-to-provide-additional-1bn

^[12] https://www.dawn.com/news/1731796