Pakistan’s foreign exchange reserves have decreased to $18.7 billion as of June 15, 2018, marking a decline of $1.463 billion from the previous week’s reserves of $20.163 billion.
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This sharp drop in reserves is primarily attributed to a surge in import payments and a reduction in foreign currency inflows. Pakistan’s import bill has been on the rise due to increased global commodity prices and a higher demand for energy imports.
Declining Foreign Currency Inflows
Impact of Trade Deficit on Forex Reserves
A major factor contributing to the depletion of Pakistan’s forex reserves is its persistent trade deficit. In the first eleven months of the current fiscal year (July 2017 to May 2018), Pakistan’s trade deficit stood at $27.06 billion, signifying a 16.7% increase compared to the corresponding period in the previous fiscal year.
This widening trade deficit has put significant pressure on Pakistan’s foreign exchange reserves as the country has to spend more foreign currency to pay for its imports than it earns from exports.
Reduced Worker Remittances
Another factor contributing to the decline in foreign exchange reserves is the reduction in worker remittances from abroad. Remittances from Pakistani workers abroad are an important source of foreign currency for Pakistan, but these inflows have declined in recent months due to factors such as economic slowdown in the Gulf countries and currency fluctuations.
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Consequences of Forex Reserves Depletion
Risks to Economic Stability
Depleting foreign exchange reserves can pose significant risks to Pakistan’s economic stability. A low level of reserves can limit the country’s ability to import essential commodities, such as food and fuel, and can also make it difficult for Pakistan to meet its external debt obligations.
Moreover, a sustained decline in forex reserves can undermine investor confidence in Pakistan’s economy and lead to capital flight, further exacerbating the situation.
Government Efforts to Address the Decline
Monetary Policy Measures
In a bid to address the declining forex reserves, the State Bank of Pakistan (SBP) has taken a number of monetary policy measures. These measures include raising interest rates, which makes it more expensive for businesses and consumers to borrow, thereby potentially reducing imports.
The SBP has also introduced restrictions on the import of certain non-essential items in order to conserve foreign exchange resources.
External Assistance
The Pakistan government has also sought external assistance to bolster its foreign exchange reserves. In November 2018, the International Monetary Fund (IMF) approved a three-year loan program of $6 billion for Pakistan, with the first tranche of $1 billion being disbursed in July 2019.
The IMF program is aimed at supporting Pakistan’s economic reform agenda, which includes measures to reduce the country’s trade deficit and strengthen its external sector.
Pakistan Forex Reserves June 2018
Conclusion
Pakistan’s forex reserves have declined significantly in recent months, primarily due to a combination of increased import payments and reduced foreign currency inflows. The depletion of reserves poses risks to the country’s economic stability and has prompted the government to take corrective measures.
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