The State Bank of Pakistan (SBP) said the situation on external front of the economy is likely to improve with the implementation of adequate policy measures.

According to a brief of the SBP, a copy of which is available with WealthPK, with the implementation of appropriate policy actions, including but not limited to the increase in policy rate by 800bps since September 2021 and efforts to curb unnecessary foreign exchange outflows, the situation on the external front is expected to improve, as witnessed in the current account deficit for July 2022 which was $1.2 billion as compared to $2.2 billion in June 2022.

The brief said Pakistan has received proceeds of $1.16 billion after the International Monetary Fund (IMF) Executive Board completed the combined seventh and eight review under the ongoing Extended Fund Facility (EFF). This will not only help improve the SBP’s foreign exchange reserves, but also act as a catalyst for realization of other planned inflows from multilateral and bilateral sources.

The bank highlighted that the value of Pakistani rupee has depreciated against the US dollar from Rs185.63 per dollar at the end of April 2022 to Rs219 per dollar on September 2, 2022, reflecting a depreciation of 15.2%.

In FY22, PKR remained under pressure since the adverse terms of trade shock and tightening global financial conditions have significantly increased external sector vulnerabilities for emerging economies like Pakistan. Terms of trade shock led to widening of current account deficit to $17.4 billion in FY22 compared to $2.8 billion in FY21.

On the financing side, tightening global financial conditions and deteriorating domestic economic environment (elevated economic and political uncertainty) adversely impacted financial inflows.

The SBP mentioned that the exchange rate came under immense pressure since the start of May 2022 due to surge in oil imports and growing uncertainty that resulted in negative demand supply gap in the foreign exchange market.

Delay in negotiations with the IMF played a pivotal role in exchange rate volatility. Since May 2019, Pakistan has adopted a market-based flexible exchange rate system, where the exchange rate is determined by market demand and supply conditions and trend in the exchange rate generally reflects the country’s external balance of payment.

Under the new system, the role of the SBP’s intervention in the FX market is limited only to avoid disorderly market conditions and build FX buffers without supressing any underlying trend.

Under this arrangement, the exchange rate serves as the first line of defence against external shocks, helps protect the country’s valuable FX reserves, and reduces the risk of a balance of payments crisis.

Regarding the irregularities in opening of letters of credit (LCs) for importers by commercial banks, the SBP said it has assisted oil importers in opening LCs whenever the importers have approached for such assistance, and the central bank is not aware of any instance where an oil importer was not able to open an LC for the import of oil/LNG.

However, the SBP Deputy Governor Dr Inayat Hussain recently told the Senate Standing Committee on Finance that the central bank was deliberating on the matter related to irregularities in opening of LCs for importers by commercial banks, and action will be taken against the banks involved in exploitation of importers.

The PKR is again on declining trend against dollar due to the pressure on imports because of floods and other factors.

Analysts believe that the pressure on PKR could remain until realization of inflows from friendly countries and other multilateral sources which were pledged prior to the deal with the IMF.

Credit : Independent News Pakistan-WealthPk