Imports soar while exports fall, putting Pakistan’s $5.82 billion reserves in jeopardy.

With import restrictions relaxed and export subsidies removed, the SBP’s reserves of $4.82 billion seem alarmingly low.

ISLAMABAD : The State Bank of Pakistan’s liquid foreign reserves fell $294 million in the past week, falling to an eight-year low of $5.82 billion on December 23rd, 2022. The SBP increased interest rates on the Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF) by 2%, increasing the rate to 13% from 11% before.

The SBP goes on to say that in the future, the markup rates for EFS and LTFF would fluctuate in tandem with the monetary policy rate. “… markup rates for EFS and LTFF will be automatically changed such that the difference between the policy rate and EFS and LTFF rates is maintained at 3%,” according to the circular.

The EFS markup rate was last increased in April 2022, from 3% to 2.5%.

Why is the SBP raising EFS and LTFF rates?

“The government is not in a position to subsidise these amenities,” says Tahir Abbas, Head of Research at Arif Habib Limited. Furthermore, the IMF may exert considerable pressure on the SBP and government to reduce these subsidised credit facilities.”

“The SBP will eventually phase out these programmes and shift these facilities to Export-Import Banks,” says Fahad Rauf, Head of Research at Ismail Iqbal Securities. “The SBP will concentrate on its basic goals, which are price stability and financial system stability,” he says.

Rauf says that this would impact exporters, particularly those that utilised the EFS, since LTFF and TERF are long-term contracts. “EFS borrowers mostly comprise of exporters in the textile, rice, sugar, cement and leather industry. Exports may fall as a consequence of the reduction in subsidies, putting more strain on the already-strained reserves.

What is the state of the reserves?

During the calendar year, the SBP’s foreign exchange reserves fell by a stunning $11.9 billion. Since the start of the fiscal year in July 2022, there has been a $3.994 billion decline. According to the Ministry of Finance, the total foreign obligations for the upcoming quarter are $8.3 billion.

The reserves are used to fund imports as well as pay foreign commitments. The country’s import cover has dropped to an alarming 1.1 months, indicating a serious fall.

The SBP lifted import restrictions on Tuesday, effective January 2, 2023, in an effort to clear the way for the 9th International Monetary Fund (IMF) review to issue the next tranche.

Ishaq Dar, Pakistan’s Finance Minister, is sure that Pakistan would finish the IMF’s ninth assessment by the end of January. This review has the potential to contribute 1.7 billion dollars to Pakistan under the IMF’s Extended Fund Facility. He announced this during a launch ceremony on Wednesday.

What does the import insurance cover?

The import cover is a broad indicator of whether or not the reserves are sufficient. Countries should save reserves equal to three months’ worth of imports or 100 percent of short-term debt.

Import cover is the number of months of imports that a country’s government could cover.

International reserves. Import cover is an essential determinant of a currency’s stability. According to an IMF analysis, 3 months of imports is still roughly adequate for countries with flexible exchange rates, given the expected advantages of reserves in decreasing both the likelihood and effect of shocks. According to the data, nations with strong institutions and policies need less reserves.

Will the import cover be lowered?

The import cover is computed by averaging the past three months’ imports. The import cover, however, in this situation may be overestimated given the SBP’s import restrictions, which were just lifted.

“Attention is drawn to EPD Circular Letter No. 9 of May 20, 2022 and Circular Letter No. 11 of July 5, 2022, wherein ADs were required to seek prior permission from Foreign Exchange Operations Department SBP-BSC before initiating any import transaction pertaining to HS Code Chapter 84, 85, and certain items of Chapter 87,” read the circular.

Previously, the cash-strapped SBP required Authorised Dealers (ADs) to obtain prior permission from the Foreign Exchange Operations Department (FEOD) and the SBP-BSC before initiating import transactions such as the issuance or amendment of letters of credit (LCs), contract registration or amendment, advance payments, and authorising transactions on an open account or collection basis. The permission was provided on a case-by-case basis.

While the SBP has lifted the restriction, ADs are being asked to prioritise or facilitate imports under the following categories: essential imports, energy imports, imports by export-oriented industry, imports for agriculture, deferred payment/self-funded imports, and imports for export-oriented projects nearing completion.

This indicates that without constraints, the country’s imports might grow, reducing reserves and, as a result, import cover.

Who else but the IMF?

The country’s total liquid foreign currency (FX) reserves was at $11.7 billion, down $293 million in a week due to a $1 million rise in FX deposits with banks.

According to Dr. Aisha Ghous Pasha, Minister of State for Finance and Revenue, Pakistan anticipates fresh cash inflows in the shape of a US$3 billion Saudi loan. This loan was also indicated by FM Ishaq Dar at the beginning of December and was scheduled to arrive in Pakistan during that month. Experts believe that a delayed IMF assessment has cost Pakistan not just its credit ratings and an inflated default swap, but also its reputation with its bilateral creditors.

The minister also dismisses any fears of Pakistan defaulting. In terms of Pakistan’s foreign debt, the minister adds the government is also in negotiations with friendly, bilateral nations to roll over loans due to mature within the specified time period. However, the restructuring of international debt is still subject to IMF approval.