Country's falling foreign exchange reserves would be a great cause of concern for the government in Pakistan. Although, liquid foreign exchange reserves meet the international adequacy standards, in terms of import and short-term debt coverage, lumpy IMF payments made to the IMF have put pressure on the country's reserves. Market sentiments have occasionally been unhinged as evident in erratic spikes in the kerb premiums.
The government is therefore required to pay heed to central bank's advice. According to SBP, any policy actions to stabilise the external account must realise that the problem stems from the financial account, not the current account. More specifically, in a scenario where the imbalances are emanating primarily from debt repayments and almost non-existent investment flows, orthodox stabilisation policies may not work. Demand compression, especially when imports are already falling and exports are affected by a weak global economy, can undermine the already low level of economic growth, and increase the debt repayment burden on the country.
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