KARACHI, March 18: The current account deficit reached $700 million in the first eight months of this fiscal year, but State Bank’s reserves have touched a level they were five years back.

The State Bank reported on Monday that the current account deficit during July-February was $700 million while deficit in February alone was $596 million.

The situation reflects two points of concern. One is that the current account deficit is taking a difficult shape as its volume is increasing. Secondly, the State Bank, which has to make payments for deficit, is facing an acute shortage of dollars.

Only reserves of commercial banks increased from $4.715 billion to $4.910 billion during 12 months.The current account deficit took a difficult shape in 2008 and newly-elected government had to sign a standby agreement with the IMF to save the country from default on the external front.

The $11.3 billion agreement with the IMF helped the government, but a sudden rise in remittances boosted reserves of the country and protected the government from fears of defaults.

However, despite higher remittances, the country had to face a current account deficit of $4.658 billion in 2012 and during eight months of last year the deficit was $3.235 billion.

As the government has completed its five-year term, reserves of State Bank depleted to a low level.

According to details, SBP’s reserves were to the tune of $8.557 billion in 2007-08 which remained $7.655 billion in March 2013.

The SBP lost $4.179 billion in the last 12 months (March-to-March).

The country’s foreign exchange reserves during the last five years posted a slight increase as these were to the tune of $12.565 billion in March 2013, compared to $11.398 billion in 2007-08.

This increase was due to surprising increase in holdings of commercial banks which doubled during the last five years.

The holdings of the commercial banks were $4.910 billion in March 2013 while the same were just $2.821 billion five years back.

Analysts and currency experts who witnessed smooth fall in value of the local currency against all major international currencies, particularly US dollar, believe that falling reserves and rising current account deficit have a direct relation with the exchange rate regime.

The recent sharp fall in reserves of the State Bank, which lost over $4 billion in one year and are expected to lose more as repayments to IMF are due in the coming months, the exchange rate regime had a nightmare.

“If current account deficit continues to rise, it would hit local currency badly, particularly since the State Bank has no hope to see a rise in its reserves,” said Aamir Aziz, an exporter of textile products.

The currency dealer said the demand for US currency is increasing, even small savers like to buy dollars as it gains fast compared to loss-making local currency which has to face inflation also.

Analysts and dealers at the inter-bank market said that the situation may improve with the installation of a new government and an agreement with the IMF for multibillion dollars loan could be possible.