Pakistan returns $500 million to Chinese bank; foreign reserves drop

Pakistan's foreign exchange reserves dropped by another $500 million in the week ended March 21, after the government paid a second tranche to a Chinese bank against a loan provided two years back.

The government paid $1 billion in March to the Industrial and Commercial Bank of China (ICBC), which it had borrowed at a rate of 7.5% two years ago.

Official sources told Nukta that the $1 billion has been paid in two instalments this month, which would be put back into the system in due time.

The foreign exchange reserves are down by $500 million this week with the State Bank of Pakistan's reserves reaching $10.6 billion, enough for almost two months of imports.

The reserves, which stood at $12.081 billion for the week ended Dec 13, have been reduced by almost $1.475 billion mainly because of the debt and interest payments during the period.

During March, reserves fell by $644 million. However, the rest of the payments have been offset through dollar-buying.

SBP's dollar purchases

Though the State Bank has not revealed how many dollars it bought in January and February, past seven months' trend indicates that the central bank must have bought at least $500 million or above in both months, analysts said.

The central bank has bought around $5.523 billion since June with slowest buying in December when nearly $536 million changed hands.

The dollar at the interbank has been trading in a thin band of PKR 278.34 to PKR 280.47 since the start of the fiscal year to date — the primary reason of this movement has been that all the loans from friendly countries like China, Saudia Arabia and UAE have been rolled over timely.

Another factor which helped boost dollar flows has been continuous arrival of remittances from overseas Pakistanis, which during the eight months of the fiscal year, averaged around $3 billion per month.

The government has been quite hopeful that remittances from overseas Pakistanis will reach record high of $36 billion during the current fiscal year. In the eight months of the current fiscal year, remittances climbed to $23.9 billion as compared with $18 billion of the same period a year ago, the State Bank of Pakistan data said.

Due to acceleration in imports, the current account during eight months of the current fiscal year has been squeezed to surplus of $691 million from $1.2 billion surplus recorded at the end of six months of the current fiscal year.

According to the latest Monetary Policy Statement, import volumes have been rising consistently in line with the pickup in economic activity. Moreover, the uptick in some global commodity prices further pushed up import payments.

However, robust workers' remittances, along with relatively moderate growth in exports, proved instrumental in financing the elevated imports.

The Monetary Policy Committee assessed that these developments are broadly in line with its expectation, and reaffirmed the FY25 current account balance projection of a surplus and a deficit of 0.5% of GDP.

Nonetheless, net financial inflows remain weak, mainly due to a shortfall in planned official inflows. At the same time, the MPC noted that the majority of debt repayments for the year have already been made.

With lower debt repayments and expected realization of planned official inflows in the remaining months of FY25, the SBP's foreign exchange reserves are likely to reach above $13 billion by June. Going forward, the MPC emphasized the importance of strengthening external buffers in the presence of heightened global economic uncertainty.