Record Pakistan foreign-exchange reserves mask economic weakness
ISLAMABAD: Pakistan’s record foreign-exchange reserves are masking economic weaknesses that risk pushing the nation toward more aid from the International Monetary Fund (IMF).
At least half of the country’s $20 billion stockpile comprises debt and grants, almost all of which have flowed in since Prime Minister Nawaz Sharif took office in May 2013. That money could leave quickly as Pakistan begins repaying the IMF in 2016 or if oil prices surge, leading to another balance-of-payments crisis.
“This is borrowed money and not a reflection of a stable economy,” said Yawar uz Zaman, vicepresident for research at Karachibased Shajar Capital Pakistan. “Finance costs will continue to grow in the years to come, which will mean we will go for another loan from an international lender.”
Sharif won a $6.6 billion loan from the IMF soon after taking charge, triggering a stock market rally that has put Pakistan among the world’s best performers. Since then, however, he’s struggled to attract more stable inflows as a shaky global economic recovery damps demand and makes investors wary.
The increase in reserves can’t be attributed to a single factor, central bank spokesman Abid Qamar said in an e-mailed response on Thursday.
However, the holdings’ “robustness” can be gauged from the import cover, which has risen to “well above” three months from less than two in fiscal year 2013, and the reserves to external debtservicing ratio has risen to 3.5 from 1.7, he said.
The record reserves will boost inflows along with recent investment agreements with China and Sharif ’s focus on alleviating Pakistan’s energy crisis, Qamar said. He didn’t directly address a question on the odds of another bailout.
Low quality
Looming debt repayments in 2016 prompted Pakistan to go ahead with a $500 million overseas bond sale in September amid rising borrowing costs even as Turkey, Iraq and Abu Dhabi pulled back. It needs to gradually start paying back the IMF, with repayments rising to $639 million in 2019.
Foreign direct investment in the year through June 2015 was the lowest since 2012 with no signs of a pick up this year. Exports in September fell by the most since 2009 and domestic investors have boosted bank withdrawals by 38 per cent from a year earlier.