State Bank might fail to achieve $13 billion reserve target by deadline

The last two weeks have witnessed a $371 million decline in the foreign reserve holdings of the State Bank of Pakistan (SBP). The outflow of foreign reserves is significantly higher than the $300 million that Pakistan was able to secure from United Bank Ltd.

According to the SBP, the reserves were used for external repayment obligations. The repayment of debt is a pressing issue for Islamabad; however, the repayments by the SBP have barely scratched the surface of the problem.

Pakistan will have to pay a staggering $26.1 billion in debt servicing, along with FY25 Dawn News reports. With SBP’s foreign reserves declining and additional debt servicing payments rearing their head, experts are finding it unlikely for the SBP to reach its reserve target of $13 billion by the end of FY25.

The rupee may depreciate strongly as analysts anticipate future outflows, possibly resulting in a sharp rise in the cost of imported goods.

While this creates an incentive to discourage imports of expensive goods, the government might impose strict import controls akin to those in May 2022 when Pakistan was teetering on the edge of bankruptcy.

If similar controls are imposed, importers may lose out on revenues as many of their goods have inelastic demands. In simple terms, consumers demand the goods that importers procure despite the significant price hikes following currency devaluation. These include items such as cigarettes and edibles, which the minister of commerce has repeatedly banned in the past to control the outflow of foreign reserves.

The philosophy behind potentially controlling imports instead of boosting exports to increase foreign reserves is quite obvious. The minister of commerce, Jam Kamal Khan, is already attempting to boost exports; however, export growth is starting to stagnate.

A senior analyst, in an interview with Dawn, confirmed that export growth has been insignificant. The issue, however, might rectify itself, with the possibility of the rupee devaluing in the near future.

A fall in the value of the rupee will make it cheaper for international buyers to purchase Pakistani goods. The primary beneficiary of the potential currency devaluation will be the textiles and apparel industry, as they are responsible for 60 per cent of all exports from Pakistan.

Despite the SBP’s falling reserves and the government struggling to roll over $14 billion in debt, Islamabad seems confident. Islamabad’s narrative is that all economic targets will be achieved by the end of the current fiscal year. Only time will tell if Islamabad’s promise holds up.