ISLAMABAD – The country’s crippled economy has taken multiple hits in thepast few years as foreign exchange reserves have been on a constantdecline. One of the reasons behind this is the huge trade deficit ofPakistan due to weak exports. The rupee has declined to a record lowagainst the dollar further hinting at a weakened economy.
To provide some relief and support to the forex reserves, Pakistan hasfinalized a deal with China for $1 billion in SAFE deposits.
China’s Central Bank, POBC, handles the State Administration of ForeignExchange (SAFE) deposits along with managing the country’s foreign currencyreserves. According to an official of the Finance Ministry, the SAFE dealwill go like this:
The situation is very fluid but the Ministry of Finance is making all outefforts to ensure the inflow of dollars in remaining two weeks. We havefinalised a deal of $1 billion as $500 million lying into the SBP will berollover, while the additional $500 million will be poured into accountsbefore June 30.
Pakistan will also raise another $200 million through commercial loans frombanks before the current FY 2017-18 ends.
Debt repayment is what worries Pakistan and its economy the most. Pakistanhas allocated the biggest portion of its budget to the debt servicing costswhich is more than the education and defense budgets combined.
Here is how the repayments to the Internation Monetary Fund (IMF) arescheduled:
– $190 million in June 2018. – $490 million in the next fiscal year starting from July 1 until September 2018. – Another $490 million to be repaid in September 2018. – $879 million in 2019-20. – $1.174 billion in 2021-22, and – $1.2 billion in 2022-23.
As per IMF, Pakistan’s gross financing gap will stand at $24.4 billion forthe current fiscal year which ends in July. The account deficit currentlystands at $14.2 billion with the projection to touch $15.6 billion by theend of the current financial year.
However, there are other estimates that show that the account deficit mightcross $16-17 billion by June. This means that the foreign reserves willfurther take a hit as the available financing currently stands at $20.7billion only.
The SBP, in a statement, said:
SBP is of the view that this market-driven adjustment in the exchange ratealong with other recent policy measures is expected to contain theimbalances in the external account thereby containing aggregate demand andalso facilitate the prospects for generating non-debt creating inflows.
It further added:
The SBP will continue to closely monitor the foreign exchange markets andstands ready to ensure stability in the financial markets and curb theemergence of speculative pressures.
Pakistan’s trade deficit currently stands at $14.0 billion withever-increasing imports. The rupee, yesterday, touched the record-low valueof 121.50 against the dollar.
However, despite multiple devaluations, the imports are no way near theexports. In order to gain a stable economy, Pakistan will have to createnon-debt inflows rather than depending on short-term solutions throughloans.