After a long interval, Pakistan’s total liquid foreign reserves have begun to inch up. According to the State Bank of Pakistan, the total reserves reached $16.6 billion by the end of November, 2024, which include $12 billion held by the SBP and $4.6 billion held by commercial banks. The SBP reserves increased by $620 million last week, primarily due to an official inflow of $500 million from the Asian Development Bank (ADB). Support has also come from the Saudi Fund for Development which extended the term for a $3 billion deposit which matured on December 5, 2024, by another year. Initially signed in 2021, the agreement has been rolled over annually since 2022, reflecting the strong brotherly ties between the two countries. The rise in foreign reserves has had a positive impact on the currency market with the Pakistani rupee remaining largely stable against the US dollar.

It may be noted here that regular external inflows into Pakistan are of vital importance in ensuring a safe level of foreign exchange reserves and ensuring stability in the value of the rupee. External inflows comprise deposits into the current account of the balance of payments mainly from exports of goods and services and workers’ remittances, as well as foreign direct and equity investment, loan disbursements into the government account.

According to experts, for external inflows a country should depend more on exports rather on capital inflows in the form of loans and grants because larger trade also boosts the national economy generating employment opportunities. On the other hand, capital inflows in various forms are unreliable and patchy. Available figures show that during the first four months of this year capital inflows into the country in the form of disbursement of loans to the government by multilaterals, bilaterals, international commercial banks  after accounting for amortization payments have been negative at $729 million, as compared to a positive net inflow of $1,315 million from July to October 2023. Last year, there was a big increase in inflows following the commencement of the IMF Stand-by Facility.

The annual target of external assistance is $19,393 million, including $11,693 million of new inflows, and roll-over of $7,700 million of deposits by China and Saudi Arabia with the SBP. But in the first quarter of 2024-25, fresh inflow of loans worth only $1,308 million has taken place, constituting only 11 percent of the annual target. The targeted inflows from multilateral agencies like the World Bank, Asian Development Bank and the Islamic Development Bank are $4,578 million. But the amount received in the first quarter is only 10.6 percent of the annual target, at $483 million. It is planned to float $1000 million of bonds and obtain $3,779 million of fresh loans from foreign commercial banks. No bond has been floated yet as foreign investors have shown little interest.

The volume of inflows through FDI also remained disappointing. The inflows in October plunged almost 20pc year-on-year to $132m, indicating the country’s economic conditions are not good enough to attract foreign investors. Overall, in the first four months, foreign private investment amounted to less than $1 billion. It was expected that the SIFC would be able to attract a quantum jump in foreign investment. But it seems that the risk perceptions of the foreign private sector remain high. Trade and industry circles cite the deteriorating law and order as the key reason for this disappointing FDI total.

In an otherwise gloomy scenario, there is some good news on the front of workers’ remittances which have jumped by 34.6 percent. This is probably a reflection of the stability of the rupee and the absence of a significant difference in the exchange rate in the official and hundi markets. It is relevant to recall here that the growth rate in remittances in July 2024 was 47.6 percent, which has declined to 23.7 percent by October.

The upshot is that instead of relying on external sources we should put more emphasis on enhancing exports.In the first four months of 2024-25, the exports of goods and services combined have shown a moderate growth rate of 8.6 percent. Exports of goods and services have also shown the same rate of growth. But the performance of textiles’ exports, our main foreign exchange earner, has been disappointing, with the growth rate of only 5.1 percent. At the same time imports have increased at a faster pace of 13 percent, as compared to 8.6 percent in exports. Consequently, the trade deficit has gone up by almost 19 percent. The situation demands that the government should develop a new comprehensive plan to double our exports in the next few years in order to get out of the debt trap we have fallen into.