The State Bank of Pakistan has made unprecedented purchases from the market, exceeding $4.2 billion in the current fiscal year, half of the country’s official foreign exchange reserves, and notably exceeding the volume of the International Monetary Fund’s (IMF) bailout package.
Despite significant debt repayments, these interventions have helped stabilize the foreign exchange reserves at $8 billion, which is pivotal in maintaining the rupee’s exchange rate at 278 against the dollar.
Analysts have suggested that the dollar’s value could have been under 250 rupees without these interventions. However, the central bank has remained reticent about its activities in foreign currency trading, keeping its substantial market interventions totalling transactions over 1.1 trillion rupees to purchase at least $4.2 billion largely undisclosed. Such central bank purchases are rare and seldom exceed the scale of a $3 billion IMF program.
The entry into the IMF program aimed partly to secure additional loans and enhance reserves; however, the country has received $9.7 billion in foreign loans this fiscal year, which proved inadequate to cover foreign debt payments and the current account deficit.
Economists observe that the central bank’s market purchases have led to a depreciation of the rupee by 40 to 45 rupees against the dollar, resulting in a minimum 5% inflationary impact. They propose that adjusting the real parity of the rupee and dollar to 235 could potentially decrease inflation rates by 5% and reduce interest rates. Conversely, authorities argue that without the central bank’s dollar purchases, foreign exchange reserves could have declined to as low as $3.5 billion, exacerbating inflationary pressures.
The rupee’s depreciation to 278 has benefited exporters, who now earn 35 to 45 rupees more for every dollar of export revenue. Pakistan seeks at least $6 billion from a new IMF program, with the central bank’s purchases in less than 10 months accounting for 70% of the volume expected over a three-year program.
The necessity for the central bank’s interventions was heightened by the Ministry of Finance’s failure to secure $6 billion through Eurobonds and foreign commercial loans. According to data from the Economic Affairs Division and the central bank, Pakistan secured $9.7 billion in foreign loans during the first nine months of the fiscal year, just over 50% of the annual budget estimate.
Recent figures show that the Real Effective Exchange Rate, which gauges a currency’s value against a basket of several foreign currencies, stood at 104.07 in March 2024, indicating stability in the rupee’s value.
As of April 19, Pakistan’s national foreign exchange reserves totalled $13.28 billion, reduced by $93.2 million. The central bank’s reserves diminished by $73.5 million to $7.98 billion, while commercial banks saw a decrease of $19.7 million to $5.29 billion.
