Foreign exchange reserves rise by $300 million with loan recovery

A currency exchange dealer counts $100 bills at a cash machine.  - AFP/File
A currency exchange dealer counts $100 bills at a cash machine. – AFP/File

The foreign exchange reserves held by the State Bank of Pakistan (SBP) crossed $4 billion following receipt of a commercial loan of $300 million.

A statement issued by the central bank showed that as of June 23, reserves with the central bank and commercial banks stood at $9.3 billion.

Out of $9.3 billion, SBP had reserves of $4.06 billion, while commercial banks had reserves of $5.27 billion.

The country’s reserve position has been in the negative territory for the past few months as Pakistan struggled to get approval for the ninth review of the Extended Fund Facility (EFF) under the International Monetary Fund (IMF).

However, Pakistan failed to receive the tranche and the program lapsed on 30 June without completion.

But the day it ended, Pakistan and the IMF reached a long-awaited staff-level agreement (SLA) on a “stand-by arrangement” (SBA) of $3 billion, the global lender announced.

The $3 billion funding, spread over nine months, is more than expected for Pakistan. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expired on Friday.

With foreign exchange reserves barely enough for a month of hyperinflation and controlled imports, Pakistan is facing its worst economic crisis in decades, which analysts say could escalate into debt default in the absence of an IMF agreement. .

The deal comes after a delay of eight months and provides some relief to Pakistan, which is grappling with a severe balance of payments crisis and depleting foreign exchange reserves.

In the statement released today, the IMF said that since the completion of the Joint Seventh and Eighth Review under the 2019 EFF in August 2022, Pakistan’s economy faced several external shocks, such as the devastating floods in 2022 that killed millions of Pakistanis. Affected lives and increased international commodity prices in the wake of Russia’s war in Ukraine.

As a result of these shocks as well as some policy missteps – including the lack of constraints on the functioning of the foreign exchange market – economic growth has stalled. “Inflation is very high, including in essential commodities. Despite efforts by the authorities to reduce imports and the trade deficit, reserves have fallen to very low levels,” the IMF statement said.

Further, it added that the liquidity position in the power sector also remains critical, including further mounting of circular loans and frequent load shedding.

The global lender said the new SBA will support Pakistan’s urgent efforts to stabilize the economy from recent external shocks, maintain macroeconomic stability and provide a framework for financing from multilateral and bilateral partners.

“The new SBA will also make room for social and development spending through better domestic revenue mobilization and careful spending execution to help meet the needs of the Pakistani people.”

The IMF further said that firm policy implementation is critical for Pakistan to overcome its current challenges, including greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and energy, especially to promote climate change. Includes further progress on reforms in the sector. flexibility, and helping to improve the business climate.

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