Pakistan is entering a historic election cycle with key vulnerabilities growing within the economy. Given the uncertainties involved in the election cycle, a danger that worries many people is a sharply deterio
rating economic situation in the midst of a noisy and chaotic transfer of power. Most eyes are on the foreign
exchange reserves these days. Does Pakistan have sufficient reserves to prevent a dramatic slide in the
value of the rupee over the course of the next nine to ten months?The government is confident that given the state of projected inflows and outflows, things will remain broadly stable. According to figures provided by Finance Minister Hafeez Shaikh in an exclusive interview to Dawn, Pakistan has already paid $700 million in debt repayment to the International Monetary Fund this fiscal year, and “over the rest of
the fiscal year, we are to pay another $5.6 billion, which includes the IMP but also all other debt payments”.
The country’s foreign exchange reserves have been on a downward glide path since December of 2011,
when they touched a peak of just above $18 billion. Latest State Bank figures show total reserves at
just above $14.8 billion, with the downward trend continuing in spite of a $1.1 billion Coalition Support Fund (CSF) inflow on Aug 2.Even the total figure is misleading, since dose to $4.4 billion of that is kept with commercial banks,and a large fraction is “encumbered,” to use a banker’s jargon,meaning that it has been borrowed from the banks through complex instruments known as swaps and forwards. This encumbered
amount had touched a peak of around $2.5 billion at the start of 2012, but it’s unclear where it stands today.“Our forecast for external flows from our different partners, bilateral flows as well as commercial
transactions is 5 billion plus so I think the forex reserves are likely to remain more or less stable dur-
ing this year, and of course remittances are strong and exports with hopefully remain as they were last
year,” say Hafeez Shaikh. “I think the situation would be manageable.”But not everybody is convinced.
Salim Raza, former State Bank Governor, thinks that this number ought to factor in developments on
the trade front as well. “Where the Exchange rate may be by the end of this fiscal year will depend
importantly on how current account trends shape out, in the second half of the financial year,”he says.It’s not clear what sorts of assumptions the finance minister’s projections are built on, regarding the direction in which oil prices may move this year, or what will happen to food prices. “A current account deficit
heading towards last year’s $4.5 billion will be a problem,” says Salim Raza, especially in view of the repayments to the IMF.A breakdown of the expected inflows shows some optimistic assumptions. For instance, it includes $800 million from auction of 3G licenses in the telecom sector, although whether or not anauction takes place before the arrival of an interim government is far from clear.
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