ISLAMABAD: During this fiscal year, the central bank ( SBP) has bought more over $5 billion from the market, setting a record that is larger than the size of the International Monetary Fund (IMF) bailout package and equal to two-thirds of Pakistan’s official foreign exchange holdings.
In spite of significant debt repayments, the central bank’s action has maintained foreign exchange reserves at $8 billion, but it has also helped to maintain the rupee’s low value of Rs278 to the US dollar. According to impartial analysts, the parity should have been less than Rs250 to the US dollar in the absence of these actions.
SBP buys over $5b from interbank
The Express Tribune was informed by government and central bank sources that these purchases were done in order to keep official foreign exchange reserves from falling below $3 billion in the absence of significant foreign loan inflows. They claimed that the central bank had acquired far more assets than $5 billion and that these acquisitions are currently ongoing.
According to one estimate, the acquisitions totaled almost $5.5 billion.
The central bank stays silent when asked about buying and selling foreign exchange. It has concealed the significant interbank market activity, which involved over Rs. 1.4 trillion in trades to purchase at least $5 billion. It is uncommon for the purchases made by the central bank to surpass the $3 billion IMF budget. Securing further loans and accumulating reserves was one of the motivations for joining the IMF programme. Nevertheless, the nation has only received $9.7 billion in foreign loans thus far, which is insufficient to sustain the current account deficit and pay back foreign debt.
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The rupee was devalued by Rs40–45 to the dollar as a result of the central bank’s purchases, according to Ashfaq Yousaf Tola, a chartered accountant and former chairman of the Revenue and Resource Mobilisation Commission, which led to significant inflation of at least 5%.
Tola emphasised that it would be advantageous for the government to stop intervening in the market and raise the actual rupee-dollar parity to Rs235. He proposed a 5% drop in inflation to help bring down interest rates and save the government at least Rs2.5 trillion a year in interest payments.
Pakistani officials counter that even worse inflation would have resulted from reserves dropping to $3 billion if the central bank had not bought dollars. People worry that the pre-June 2022 episode, where reserves were critically low.
According to Asif Qureshi, CEO of Optimus Capital Management, the rupee-dollar’s inflation-adjusted value for March 2024 is approximately Rs243, taking into account the cumulative inflation differentials between Pakistan and the United States.
Dollars were being bought by the central bank from the interbank market. If this money had been on the market, international companies would have had enough cash on hand to return their profits home.
Tola said that with the currency trading at Rs. 278 per dollar, exporters were getting paid an extra Rs. 35 to Rs. 45 for each dollar they brought in from sales.
The most recent IMF report also mentioned that gross reserves had increased due to ongoing SBP purchases and payments from international financial institutions. Even with the increase in gross reserves, there is still not enough cushion to cover 1.4 months’ worth of imports.
Pakistan is requesting a fresh IMF programme with a minimum of $6 billion, and the purchases made by the central bank in less than a year accounted for 85% of the program’s three-year budget.
Pakistan has been using a market-based flexible exchange rate system since June 2019. In this system, supply and demand in the market dictate the exchange rate. The notion of a market-based currency rate is also violated by the central bank’s involvement in the form of dollar purchases.
The rupee’s value has been overadjusted, according to independent analysts, and the current account deficit numbers indicate that imports at Rs278 to the dollar are no longer feasible.
The failure of the Ministry of Finance to guarantee $6 billion in inflows from Eurobonds and international commercial loans was one of the reasons behind the central bank’s intervention. Pakistan obtained $9.7 billion in foreign loans for the first nine months of the fiscal year, slightly over 50% of the annual budget predictions, according to data from the Economic Affairs Division and the central bank.
The government will be able to lower gas prices by at least Rs40 per litre if the currency appreciates to less than Rs250 to the US dollar.
Due to its substantial reliance on energy imports—which account for about 34% of its overall import bill—Pakistan is susceptible to changes in the price of oil globally and in exchange rates.
According to Pakistani authorities, the rupee was not undervalued because the Real Effective Exchange Rate (REER), which compares a currency’s value to a weighted average of multiple foreign currencies, climbed to 104.07 in March 2024. The central bank claims that this is the highest level of the REER since April 2021.
When a nation’s REER is less than100, it indicates that imports are costly but exports are competitive. When REER is more than 100 on the index, the situation is reversed.
The 6% to 8% rupee depreciation last week in Washington was described as routine by Finance Minister Muhammad Aurangzeb. Independent experts, on the other hand, advise against further devaluation and favour a 14%–20% increase in the value of the rupee.
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