Pakistan’s foreign exchange reserves have gone down significantly over the last one year from $18.1 billion in August 2016 to $14.3 billion in August 2017. This decline in foreign exchange reserves can make Pakistan ineligible to receive financial assistance from International Bank of Reconstruction and Development (IBRD), one of the two financial arm of World Bank.
In order to be eligible to receive a loan from IBRD, one important condition is to have foreign exchange reserves equivalent to three months of import bill of the country. Currently, Pakistan’s foreign exchange reserve is about 3.2 months of the import bill. But it is feared that the foreign exchange reserve could slide down below the 3 months import bill in last week of August or first week of September.
Out of the total foreign exchange reserves, $3.9 billion is in short term borrowings by the State Bank of Pakistan (SBP). Net reserves with the SBP excluding the short term borrowings stand at $10.4 billion only. Thus, immediate action is required in order to curb the decline of foreign exchange reserves that have gone down by $3.8 billion over the past one year.
Spokesperson of the Ministry of Finance remained optimistic about the progress saying that exports and remittances have improved in the month of July. Exports witnessed a growth of 10.5% in July as compared to the same period last year mainly due to the Rs. 180 billion export package given out by the government earlier this year.
Similarly, remittances during the month of July were up by 16% on YoY basis. The government expects that the growth in exports and remittances can bring in more foreign direct investment that will boost the declining FX reserves. The government is also working on introducing policies that will promote exports and put restrictions on import so that trade deficit can be reduced in the country.
What Will Happen if Pakistan is Ineligible to Borrow from IBRD?
Pakistan is one of the few countries that can borrow from both financial arms of World Bank due to its credit worthiness. And being ineligible to borrow from IBRD can deteriorate the credit worthiness as lenders will be watchful in giving long term loans to the country. Once the credit worthiness goes down it is really difficult to boost confidence of lenders who become circumspect of credit default.
Pakistan is in need of financing from the World Bank and other international institutes. Any damage to its credit worthiness will damage the prospect of future financing specifically at a time when trade deficit has ballooned to a record high of $32.6 billion and political instability is gripping the country following the ouster of former Prime Minister Nawaz Sharif.