Finance: The deepening forex crisis

By Mohiuddin Aazim
Published in DAWN on January 16, 2023

Pakistan remained in the grip of the foreign exchange crisis in 2022. Now, at the beginning of 2023, the situation has deepened further.

On January 6, forex reserves held by the State Bank of Pakistan (SBP) plunged to $4.343 billion, enough to cover just three weeks of imports, after the country repaid $1bn commercial loans of two UAE-based banks. Despite such a massive decline in the forex reserves, the rupee remained “stable” in the interbank market. It closed at 228.15 to a US dollar on January 13, unchanged from January 12’s closing of 228.14 per dollar — thanks to the SBP’s policy of keeping the local unit in the “oxygen tent”.

At the end of January 2022, the SBP had roughly $16.608bn forex reserves that kept falling for most of the year, primarily due to heavy external debt servicing and import financing.

‘Billions of dollars’ may, however, start coming in now from the international financial institutions and friendly countries Saudi Arabia, China and the UAE after the much-awaited release of the last withheld tranche of an ongoing $6bn International Monetary Fund (IMF) loan. The government may also seek another loan from the IMF and request the Fund to disburse the first tranche of it along with the withheld one.

The gap between the official interbank and the effective open market exchange rates has risen to Rs30 per dollar as the SBP artificially holds interbank exchange rates in a narrow band

Additionally, billions of dollars will also begin to come from the international community in the post-flood global financial support.

How many billions of dollars will exactly flow in 2023?

Very difficult to tell in advance. We need to keep counting as part of the expected funding may arrive in a few weeks or months, but part of it is due in three to five years. The post-flood support pledges from global financial institutions and countries exceed $10bn against post-flood requirements of $16.3bn. But 90 per cent of these pledges are in the form of loans, and only 10pc will come as aid.

Separately, Saudi Arabia has shown a willingness to place another $2bn with the SBP taking the total of its forex deposits with the SBP to $5bn. In addition, the Kingdom has also signalled to make medium to long-term investments worth $10bn in Pakistan, mainly in its petroleum sector.

The UAE is expected to provide $3bn financial help, including the rollover of its $2bn forex deposits with the SBP. Saudi Arabia has also decided to extend $1bn oil on deferred payment. And China is likely to pump in close to $9bn into Pakistan’s economy through the rollover of sovereign loans offered earlier, refinancing Chinese commercial bank loans to Islamabad and enlargement of the bilateral currency swaps. The government is also expediting the sale of two LNG plants to Qatar to raise an estimated $1.5bn.

Whereas the lined-up forex inflows will keep coming at varying pace year after year, the bulk will only enlarge Pakistan’s outstanding external debts and increase its yearly debt servicing requirements. This means that the country may find itself trapped in foreign debts within a few years if it fails to increase its exports of goods and services in a big way, reverse the declining trend in remittances and create an enabling environment for foreign investors.

Representatives of the value-added textile sector recently said at a press conference that textile factories are being deprived of necessary imported raw materials and “letters of credit worth as low as $5,000 are being refused.” Importers of pulses and manufacturers of cooking oil and ghee cannot lift import consignments of pulses and edible oil from customs’ bonded warehouses as banks keep delaying import payments.

Poultry farmers say they continue to wait to lift imported poultry feed from the port as their letters of credit are not being cleared.

People are unable to buy enough dollars to repatriate abroad for the educational/medical expenses of their loved ones. Credit card and debit card holders can use only up to $30,000 per person per year in forex transactions — this limit was $100,000 about a year ago.

Most people going abroad find it too hard to purchase even hundreds of dollars (not thousands) from foreign exchange companies. The gap between the official interbank and the effective open market exchange rates has risen to Rs30 per dollar as the SBP artificially holds interbank exchange rates in a narrow band by restricting imports and other forex outflows. On normal days, this gap ranges between Rs2-Rs3 per dollar).

On the other hand, dollar smuggling to Afghanistan continues amidst an ongoing crackdown against it by law enforcement agencies and customs authorities. Massive hoarding of dollars as a store of value also continues in anticipation of a looming depreciation in the rupee’s value.

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