Pakistan's foreign exchange crunch seen worsening

Pakistan's foreign exchange crunch seen worsening
REUTERS

KARACHI, AUG 28: Cash-strapped Pakistan's foreign exchange drought is likely to worsen before export earnings from the new cotton crop start flowing in later in the year.

Bankers and analysts said on Monday the military-led government that seized power last October has done little to convince the country's donors to resume funding or private investors to seek opportunities.

The country's central bank in a statement last week termed as "comfortable" the cash foreign exchange reserves of $1.1 billion but analysts said the figure suggests economic managers will have to do more juggling to avoid a Financial collapse.

"A closer look into the composition of the reserves show the country hardly has import coverage of 1.5 (weeks) to two weeks. This situation is frightening," the head of research at a foreign brokerage house said.

Bankers said over $450 million out of the $1.1 billion inreserves were private foreign currency deposits placed by local banks with the central bank.

ARAB HELP: They said more than $ 300 million of the reserves were deposits placed by friendly Arab countries as balance of payment supports. That is apart from close to a billion dollars in suppliers' credits to enable Pakistan to import fuel from them.

"Technically or effectively our cash reserves are no more than $350 million and you can only imagine how the country will manage," a senior banker said.

He said that in rough terms Pakistan has a monthly import bill of about $900 million, a monthly trade deficit of $150 million to $200 million and a monthly current account deficit of $250 million to $275 million.

Pakistan's trade deficit is expected to be around $1.8 billion in fiscal 2000/2001 against $1.77 billion in the previous fiscal year. However, higher export inflows following the peak harvest season for the cotton crop in December usually help lower the pressure on reserves, the banker said.

Cotton and related textile products account for 60 per cent of Pakistan's export earnings. An economist at a local investment bank said the oil credit facility helps lower the cash impact of the trade deficit while the remaining gap is filled by central bank direct purchases of foreign currency from the kerb market.

The State Bank of Pakistan in fiscal 1999/2000 which ended in June purchased an estimated $1.8 billion from the kerb market to compensate for the plunge in private inflows, bankers said.

LIMITED TRICKS: "Generosity of Arab friends and purchases from kerb are the only tricks in the bag of the central bank. Other than that they (government) haven't done anything significant or substantial to help boost forex inflows," the economist said.

"And in case of a financial emergency they will resort toold tricks, like snatch away FCAs (foreign currency accounts) and put a hold on outflows," he added.

Private remittances and foreign exchange inflows in bank deposits of about $3 billion a year dropped drastically after Pakistan tested nuclear devices in May 1998 and, to avoid a run on banks, froze foreign currency accounts. The inflows are still only half of what they were before.

Private direct and portfolio investments that peaked at about a total of about $5 billion in the period of 1994-1996 have come down to a trickle. The International Monetary Fund suspended its lending in June last year due to Pakistan's failure to meet agreed targets and is still not convinced the country would implement tough structural reforms.