Pakistan China sign $1 billion SAFE deposits deal

Pakistan China sign $1 billion SAFE deposits deal

ISLAMABAD - The country’s crippled economy has taken multiple hits in the past few years as foreign exchange reserves have been on a constant decline. One of the reasons behind this is the huge trade deficit of Pakistan due to weak exports. The rupee has declined to a record low against the dollar further hinting at a weakened economy.

To provide some relief and support to the forex reserves, Pakistan has finalized a deal with China for $1 billion in SAFE deposits.

China’s Central Bank, POBC, handles the State Administration of Foreign Exchange (SAFE) deposits along with managing the country’s foreign currency reserves. According to an official of the Finance Ministry, the SAFE deal will go like this:

The situation is very fluid but the Ministry of Finance is making all out efforts to ensure the inflow of dollars in remaining two weeks. We have finalised a deal of $1 billion as $500 million lying into the SBP will be rollover, while the additional $500 million will be poured into accounts before June 30.

Pakistan will also raise another $200 million through commercial loans from banks before the current FY 2017-18 ends.

Debt repayment is what worries Pakistan and its economy the most. Pakistan has allocated the biggest portion of its budget to the debt servicing costs which is more than the education and defense budgets combined.

Here is how the repayments to the Internation Monetary Fund (IMF) are scheduled:

- $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 for the current fiscal year which ends in July. The account deficit currently stands at $14.2 billion with the projection to touch $15.6 billion by the end of the current financial year.

However, there are other estimates that show that the account deficit might cross $16-17 billion by June. This means that the foreign reserves will further take a hit as the available financing currently stands at $20.7 billion only.

The SBP, in a statement, said:

SBP is of the view that this market-driven adjustment in the exchange rate along with other recent policy measures is expected to contain the imbalances in the external account thereby containing aggregate demand and also facilitate the prospects for generating non-debt creating inflows.

It further added:

The SBP will continue to closely monitor the foreign exchange markets and stands ready to ensure stability in the financial markets and curb the emergence of speculative pressures.

Pakistan’s trade deficit currently stands at $14.0 billion with ever-increasing imports. The rupee, yesterday, touched the record-low value of 121.50 against the dollar.

However, despite multiple devaluations, the imports are no way near the exports. In order to gain a stable economy, Pakistan will have to create non-debt inflows rather than depending on short-term solutions through loans.