‘Pakistan’s debt repayments on track’, SBP chief on depleting forex reserves

• SBP chief says reserves expected to rise in second half of FY23.
• Remaining outstanding repayment stands around $4.7bn.
• He adds administrative measures on imports need to relax gradually.

State Bank of Pakistan (SBP) Governor Jameel Ahmad Thursday reiterated that all debt repayments are on track, adding that country's foreign exchange reserves are expected to increase in the second half of the current fiscal year.

In the latest episode of the SBP podcast series, the governor revealed that separate loans of $1.2 billion had also been repaid to two foreign commercial banks. He said there was an understanding with the banks for the money to be returned but did not give a time frame.

During the podcast, he discussed the country’s capacity to meet its international financial obligations and addressed concerns over external account vulnerabilities.

He said, for the fiscal year 2023, around $33 billion were to be repaid to external stakeholders, including the current account deficit of $10 billion and $23 billion in loan repayments.

Out of the payable $23 billion external debt, Pakistan has already repaid more than $6 billion whereas as a bilateral loan of $4 billion has been rolled over with the cooperation of relevant countries.

Another $8.3 billion maturing obligations are expected to be rolled over as discussions are underway, Ahmad said, adding that the remaining outstanding repayment stands around $4.7 billion for the remainder of this fiscal year. 

This includes $1.1 billion in commercial loans that have to be paid to foreign banks and $3.6 billion in multilateral loans.

‘SBP has enough reserves’

Recalling that Pakistan has received foreign exchange inflows of $4 billion (excluding the rollovers of $4 billion), the SBP chief assured that Islamabad will continue to make timely loans payments while inflows are expected to increase significantly in the second half of the current fiscal year.

“Along with the rollover of some external obligations, Pakistan’s foreign exchange reserves are expected to increase significantly in the coming months,” he maintained.

It should be noted that during the week from November 28 to December 2, SBP reserves reached $7.9 billion after receipt of $500 million from Asian Infrastructure Investment Bank (AIIB).

During the week under review, SBP paid $1,000 million against maturing Pakistan International Sukuk and some other external debt repayments. Accordingly, Pakistan’s foreign exchange reserves stood at $6.7 billion as of December 2, 2022.

Earlier the central bank had repaid two commercial loans totalling $1.2 billion. These banks are expected to refinance the same amount, in the coming days, helping to bolster the country’s foreign exchange reserves.

“The government is also in talks with a friendly country for the disbursement of a $3 billion loan and negotiations with multilateral agencies are progressing for further financial support,” he mentioned.

He elaborated that the debt profile of Pakistan is composed of bilateral and multilateral creditors and only a small percentage is owed to foreign banks.

“The SBP has enough reserves to repay all obligations in an effective manner and the inflows expected will boost forex reserves,” he claimed, contradicting the reports of various brokerage houses which reveal Pakistan only has an import of less than one month.

‘Situation is challenging’

Ahmad highlighted the following global issues as major challenges, which include:

• War in Ukraine
• Historic increase in the international commodity prices
• Monetary tightening pursued by central banks

“As a result of this, developing countries, including Pakistan are facing difficulties in raising funds from international financial markets,” he mentioned, stating that on the domestic front, the economy is impacted by floods which created challenges.

“Overall the situation is challenging; however, the SBP and government are taking measures to improve it,” he assured the masses.

He explained that at the beginning of the fiscal year, SBP projected the current account deficit to clock in at $10 billion for FY23, however, as Pakistan was hit by historic floods, this led to expectations of some increase in imports particularly that of wheat, fertilisers and cotton.

“Along with this, the country’s exportable crops were impacted due to floods and as a result, it was expected that Pakistan’s current account deficit will increase by $2 to $3 billion.”

‘Import restrictions to withdrawn gradually’

Ahmad, during the podcast, stated that in the international market, however, some important developments have taken place including a decrease in the price of petroleum products. Meanwhile, SBP has also taken policy actions that will reduce some outflows significantly.

“As a result of these policy interventions and other measures, it is expected that the current account deficit will remain below $10 billion for FY23,” he maintained.

He recalled in the last quarter of the fiscal year 2022-23, the SBP and government implemented some administrative measures to rationalise imports and improve the external accounts position.

“The SBP placed restrictions on imports […] these restrictions covered about 15% of Pakistan’s total imports whereas no restrictions have been placed on 85% of imports,” he said.

Thereafter, SBP in coordination with the government identified eight to 10 business sectors which were genuinely affected and needed relief. They were allowed to import 50% to 60% of their monthly average import payments made from January to June 2022.

Similarly, some importers reported cases of demurrages where letters of credit for imports were opened before the issuance of SBP restrictions. The central bank in coordination with commercial banks resolved the issue and the backlog of payments were cleared.

Furthermore, some relaxations were also given after consultation with industry, he said, adding that consequently, less than 10% of the country’s imports are currently subject to administrative controls. “All such restrictions are temporary and will be withdrawn gradually,” he claimed.

The SBP governor said petroleum and pharmaceuticals are among the priority sectors for SBP adding there are absolutely no restrictions on the import of petroleum products, or on the import of raw materials or inputs related to the pharmaceutical sector.

He said SBP recognises that administrative measures on imports must not be continued and need to relax gradually. “From next year, the bank may review them and bring more ease to the businesses,” he said.