Pakistan has seen a substantial decline in its foreign exchange reserves, with a drop of 65% to $5.8 billion in 2022, according to official data. This has exposed the country to the risk of default on its international financial obligations. At the start of the year, Pakistan had reserves of $16.6 billion, but they decreased as inflows slowed and outflows increased. The sharpest decline occurred in the first quarter of 2022 when reserves shrunk by over $6 billion to $10.4 billion by April. This reduction has put pressure on the national currency, causing it to depreciate by more than 21% in 2022.
Experts attribute the decline in reserves to delays in the progress of Pakistan’s $7 billion International Monetary Fund (IMF) program. The country is currently engaged in the 9th review of the program. Still, there is a deadlock between the two sides as Pakistan is hesitant to implement certain IMF conditions, including market-based exchange rates and energy price adjustments.
“The major cause of Pakistan foreign exchange reserves depletion was the higher amount of outflows or repayments as compared to the inflows that exerted pressure on the forex position,” Samiullah Tariq, a research director at the Pakistan-Kuwait Investment Company, told Arab News.
“Key contributing factors were higher current account deficit due to costly imports, global interest rate hike, and we are out of the IMF (International Monetary Fund) program due to which we could not arrange financing.” he added.
The downhill in reserves has also had a significant impact on the country’s economy, with measurements taken by the government to halt dollar outflows resulting in a slowdown in industrial activity. Pakistan now has around $8 billion in loan repayments due over the next three months, a potentially difficult situation given the current state of reserves. Nevertheless, former finance minister Ismail believes that reviving the IMF program and rolling over $2 billion in deposits from the United Arab Emirates could help stabilize the reserve position.
While talking to Arab news, Ismail said,
“When the coalition government assumed the charge, forex reserves were already down to $10 billion in April and had dropped by over $5 billion by March 2022,”
“Our payments have increased substantially and if we control the current account deficit, the repayments are so enlarged that it is not being controlled,”
Despite this positivity, Ismail alerts that the next three to four years will be difficult for Pakistan due to its large repayment obligations. In the meantime, it is crucial for the country to consider engaging with friendly nations through diplomatic means to secure cash deposits and rollovers. Also, considering to allow the national currency to adjust according to market conditions. By addressing these issues and finding solutions, the country would be able to get rid of its current challenges and stabilize its economy.