The SBP reserves are up by $593 million in the week ending April 27, 2018. Does this snapshot deserve a wow? The short answer is that there is absolutely no reason to not worry on current reserves position.
In the last week of April, the country got $1 billion external help from China, while the reserves were up by only $593 million. Thus, there was a net reserve fall of $407 million in a week. That is too big a number to not worry; as one cannot expect a billion dollar from China every second month. But we surely need big chunk of foreign debt at the tail end of FY18. Read it further for why.
The current account deficit for 9MFY18 stood at $12.0 billion; implying an average monthly CAD of $1.3 billion. Now with 10th month (April) already gone with its CAD translated in reserves number; the deficit for May and June are to be financed.
Let’s take $2.5 billion deficit for May-June, assuming $1.25 billion of deficit per month. The debt repayment has to be added in the equation to compute the gross funding gap for the period. According to the SBP data on international reserves position and foreign currency liquidity, published for March end, the external debt maturity is too high for May and June.
The foreign principal debt repayment was $72 million for April. The bomb however, is coming in May and June as principal debt repayment for these two months is at staggering $3.2 billion. Adding this to expected CAD of $2.5 billion, the gross funding requirement for May-June is $5.7 billion.
Phew! As many billions of dollars from China and others are needed to cover this gap without letting the reserves dip any further. There is no way this could be financed; so expect reserves to fall by a couple of billion dollars from SBP reserves of $11.5 billion by April end.
Does this warrant further currency adjustments? Well, not really. There is a limit till the currency depreciation can help, beyond which it would be counterproductive. The core inflation has moved up to 7.0 percent in April. The inflationary consequences of further depreciation could be lethal.
However, the bitter pill ought to be swallowed. What is needed is currency equilibrium. The real effective exchange rate computed by IMF and published by SBP, is swiftly moving towards its equilibrium. Ideally, it should hover around 100 marks. If it is above 100, depreciation is warranted. The REER has come came down to 111.7 in March-18 from the peak of 127.4 in April-17.
The REER is computed on monthly average. This implies that the partial impact of 5 percent depreciation in March will bring the number further close to 100 in April. The impact of 5 percent currency depreciation in December helped the REER to move from 124.2 in Novemer-17 to 119.2 in December-17 and to 115.1 in January-18. Hence, in April it may reach around 105-7 levels.
Now that would be a decent number to live with, for a while. There is no need to panic as the storm of May and June would pass. The debt principal payment for subsequent nine months (July-18 to March-19) is $3.1 billion, making average payment of $350 million a month.
Hence, the need to gradually get more debt is inevitable as assuming CAD of $1.25 billion per month, on average; the monthly gross funding would be around $1.6 billion per month in FY19.
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