Despite having borrowed $4.4 billion from commercial banks in 2016-17, the reserves of State Bank of Pakistan (SBP) have declined by $3.9 billion between October 2016 and July 21, 2017. The value of Rupee is under immense pressure following the increase in dollar exchange rates in the market.
The exchange rate in the interbank market declined from Rs.108 to Rs. 105.40 and has remained a bit stable owing to the strong influence of the SBP. However, this may not last for long if the pressure on the rupee keeps on mounting due to the falling reserves.
Commercial borrowing is costlier than the loans accumulated from bilateral and multilateral sources, resulting in even more bigger loans.
The government hasn’t announced the exact figure for debt servicing on external loans. However, it paid $1.55 billion in the first quarter, $1.25 billion in the second quarter and $2.43 billion in the third quarter for retiring off debts. Following these trends, $2 billion in debt servicing cannot be ruled out in the last quarter.
Having already surpassed a mammoth $5.2 billion in debt servicing, the annual debt servicing is expected to cross $7 billion this year which will be a record.
The record current account deficit of $12 billion in 2016-17, the record debt servicing costs this year and the declining reserves do not bode well for the economy. The economic outlook seems scary, with experts saying that the rupee might witness a bigger jolt than the one on July 5, 2017, when the dollar witnessed a 3.1% increase against the local currency.
Debt servicing was $5.4 billion in 2014-15 and $5.31 billion in 2015-16. With a trade deficit bigger than the total imports, decreasing foreign reserves and mounting account deficit, the SBP will struggle to meet the account deficits.
The increased outflows and declining inflows would mean more borrowing from commercial banks in 2017-18.
The government has failed to meet its targets, having already borrowed $1.5 billion in June this year. The target was to borrow $2 billion but it has easily surpassed this figure and had reached $4.4 billion by the end of June.