Pakistan central bank buys nearly $4 billion in 5 months

The State Bank of Pakistan's (SBP) greenbacks' buying spree continued unabated from June to October, during which it bought $3.836 billion worth of the currency to stabilize foreign exchange reserves and make timely external debt payments.

According to SBP data, it bought the highest amount of dollars — $1.026 billion — in October after purchasing $946 million in September.

The central bank commenced buying of dollars in June, mainly to strengthen foreign exchange reserves and pay external debts timely.

The country's foreign exchange reserves at the end of May were around $13.650 billion while by October-end, they had risen to $15.467 billion. Moreover, the State Bank's forex reserves rose by $2.094 billion to $11.203 billion by October-end.

In the first quarter of the current fiscal year, external payments amounted to around $3.5 billion, of which nearly $2.2 billion were principal external debt payments and $1.3 billion were interest payments.

Saad Hanif, head of research at Ismail Iqbal Securities, said the purpose of the central bank's buying spree was to stabilize the currency and make timely external debt repayments.

"If SBP does not buy dollars, short-term appreciation could occur, but structural weaknesses such as high imports and external debt repayments would eventually lead to renewed depreciation," he said. This could result in higher inflation, rising import costs, and more pressure on forex reserves, Hanif said.

"As we all know, without adequate reserves, Pakistan's ability to defend the rupee during crises weakens, making the economy more vulnerable to external shocks", he said.

Muhammed Awais Ashraf, director research at AKD Securities, said SBP is purchasing dollars from open market to make interest and profit repatriation payments, besides boosting its reserves.

In the six months ended December, SBP repatriated $1.214 billion compared with $568 million during the same period last year.

"If the dollars were not purchased, then the rupee would likely not have strengthened against the dollar. But SBP has to take additional debt to meet interest payments on external debt," he pointed out.