Now, Pak may face forex crisis as reserves dip below $10 billion: Report

Updated on Jun 03, 2022 12:58 PM IST
Pak’s foreign exchange reserves fell below $10 billion, threatening to spill over into a full-blown economic crisis unless policy makers secure a loan from the International Monetary Fund.
Pakistan’s inflation rate has accelerated to over a two year high on rising food and fuel prices, and stocks have tumbled about 5% this year. In photo: Pakistan Prime Minister Shehbaz Sharif.(AFP )
Pakistan’s inflation rate has accelerated to over a two year high on rising food and fuel prices, and stocks have tumbled about 5% this year. In photo: Pakistan Prime Minister Shehbaz Sharif.(AFP )
Bloomberg |

Pakistan’s foreign exchange reserves fell below $10 billion, threatening to spill over into a fullblown economic crisis unless policy makers secure a loan from the International Monetary Fund.

The stockpile decreased by $366 million in the week ended May 27 to stand at $9.72 billion, the central bank said in a statement on its website Thursday. That’s roughly a 50% drop from August and enough to pay for less than two months of imports. 

The shortage of dollars could worsen as the nation forecasts its trade deficit will widen to a record $45 billion in the year ending June. Authorities have raised fuel and electricity prices, a key condition to unlock the remaining $3 billion of an existing loan by the multilateral lender.

In addition to raising fuel prices, Pakistan will need to make further fiscal adjustments to narrow the budget deficit for fiscal year 2023 to secure the IMF loan, said Raphael Mok, head of Asia country risk at Fitch Solutions in Singapore. This will likely entail measures to boost tax collection and to reduce subsidies and capital expenditure, he said.

“The widening current-account deficit is also a source of concern for policy makers and IMF officials, for which the government has announced a ban on over 30 luxury goods including cars,” Mok said.

A $2.3 billion deposit from Chinese banks is likely to shore up Pakistan’s foreign reserves, the country’s finance minister Miftah Ismail said in a Twitter post Thursday, adding that the terms and conditions for the refinancing have been agreed upon. 

Still, Pakistan’s use of those funds may be limited because it’s unclear what the terms and conditions are, said Mok.

The cost of insuring Pakistan’s debt against the risk of default remains elevated after jumping to the highest in over a decade last week. The nation’s currency has pared some losses after hitting a record low 202 per dollar last week, but is still down about 10% this year, according to data compiled by Bloomberg.

Pakistan’s inflation rate has accelerated to over a two year high on rising food and fuel prices, and stocks have tumbled about 5% this year. Earlier on Thursday, Moody’s Investors Service downgraded its outlook on Pakistan to negative from stable, citing financial concerns, including a delay in the revival of IMF aid.

 

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