SBP informs Senate panel: Forex’s fall has led to 28.2pc PKR slump in FY23 so far

ISLAMABAD: The country’s foreign exchange reserves are at present below one month of imports. This led to an increase in pressure on the exchange rate which has depreciated by 28.2 percent during the current fiscal year so far.

This was stated by the State Bank of Pakistan (SBP) in a brief to the latest meeting of the Senate Standing Committee on Finance on the current economic situation with a special focus on low foreign exchange reserves, soaring inflation, declining exports, and a high-interest rate.

The meeting was informed that the economy continues to depict signs of a policy-induced slowdown, mainly in response to monetary policy tightening and administrative measures to counter inflationary pressures and address external challenges.

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Additionally, the floods affected cotton and rice crops in particular and industrial activity through their forward linkages, large-scale manufacturing continues to contract, by 3.7 percent during July-December 2023.

Demand suppression and activity slowdown have led to lower working capital off-take. Furthermore, the latest business and consumer confidence surveys indicate subdued domestic economic activity.

About foreign exchange reserves, the committee was informed that the total foreign exchange reserves have declined to $9.3 billion as of 24th February 2023, mainly due to external debt repayments, however, the current account deficit is narrowing owing to policy measures. The meeting was informed that compared to the widely used reserve adequacy level equivalent of three months of imports, the country’s foreign exchange reserves are currently below one month of import. This is also reflected in increased pressure on the exchange rate, which has depreciated by 28.2 percent during fiscal year 23 so far.

Private financial inflows, via foreign investment and borrowings, are substantially lower than last year. Pakistan has attracted only $0.69 billion of foreign direct investment (FDI) during July-February fiscal year 23 compared to $1.2 billion over the corresponding period last year.

The government repaid $2.4 billion in principal loans on net basis during July-January fiscal year 23, with amortization outpacing the disbursements. This compares to a net inflow of $6.3 billion received during the corresponding period last year. Investors are observing unfolding political and economic developments in the country and awaiting clarity about the revival of the IMF programme.

Going forward, these flows are expected to improve owing to assurances from friendly nations and sizable $9.7 billion pledges for reconstruction in flood-affected areas. In this context, successful completion of the ongoing 9th EFF review of the IMF is critical.

The revival of the IMF programme would unlock external inflows from other multilateral, bilateral and commercial sources to help cover the country’s gross financing needs and therefore improve the forex reserve position.

The meeting was informed that inflationary pressures remained elevated across all sub-components - food, core, and energy. Energy inflation is also elevated, rising by over 37 per cent year-on-year in urban and rural baskets in February 2023. This is largely driven by high global oil prices, exchange rate depreciation and an increase in PDL rates on petrol and diesel.

The core inflation has maintained its upward trajectory owing to materialisation for second-round impact and rising inflation expectations. The recent pressures on exchange rate and increase in taxes and duties in Supplementary Finance Bill have added to inflationary pressures.

The meeting was informed that the decline in export is broad-based except for some high value-added textile items. Although the high value-added textile (such as readymade garments, bed wear and knitwear) export quantum are holding their elevated level, lower global prices are keeping export values low.

The major contribution to the decline in exports came from the food group, rice exports, affected by production losses due to floods. The global economic slowdown, moderation in cotton prices, and increase in domestic cost of production were other factors of decline in exports.

The Monetary Policy Committee (MPC) has to make tough decisions to keep inflation expectations anchored amid rising inflationary pressures and increasing political and economic uncertainty. The MPC noted the recent fiscal measures, including an increase in GST and excise duties, reduction in subsidies, adjustments in energy prices, and the austerity drive, will keep inflation elevated for the next few months.

Weak external position, challenging global economic environment and exchange rate depreciation warrant a strong policy response.

Copyright Business Recorder, 2023