KARACHI: Currency dealers said on Saturday the State Bank of Pakistan (SBP) has been buying dollars from local banks and borrowing from overseas commercial banks to maintain foreign exchange reserves at the current level of $21.5 billion.

The government is trying to arrest the fall in foreign exchange reserves that have been declining since October last year.

Recently, Finance Minister Ishaq Dar said the reserves will grow to $23bn by the end of the current fiscal year. Reserves of the SBP fell 2.5bn to $16.5bn in the last six months. The country’s overall reserves declined by the same amount over that period, which shows the reserves held by private banks recorded no decline.

Currency experts said it is the best time for borrowing from commercial banks. Low interest rates globally have made borrowing highly attractive for governments like Pakistan to shore up their reserves.

Reserves took a hit because of heavy repayments on external debt, unprecedented increase in imports that widened the trade deficit to $20bn in 2015-16 and rising oil prices in international markets.

“This is not unusual for the central bank to influence currency markets, control exchange rates and purchase dollars from the local market. This has been its practice for many years,” said Atif Ahmed, a currency dealer in the interbank market.

The SBP reported recently that the country has been borrowing from foreign commercial banks. The low interest rate and revaluation of the exchange rate offset the impact of commercial borrowings.

While inflows from multilateral institutions declined in the first half of 2016-17, the government borrowed substantially from commercial banks. In addition to $1bn raised through sukuk, the government also borrowed $900 million from foreign commercial banks, said a report by the SBP.

The currency revaluation gains reduced the growth in external debt, which increased by just $130m, although the government raised $2.7bn from sukuk, commercial borrowings and loans from China.

“Tight control over money laundering practically destroyed the hundi and hawala business, which brought stability in the exchange rate. Ultimately, the flow of dollars normalised the currency market,” said Anwar Jamal, a currency dealer in the open market. He added that the reserves held by commercial banks, which amount to $5bn, have a notable impact on the exchange rate.

He said borrowing dollars from foreign commercial banks is favourable for the country. In addition, the depreciation of international currencies against the dollar is also good for Pakistan, he noted.

The SBP reported that the country gained $2.1bn as a result of the revaluation of currencies, which offset the impact of commercial borrowings from foreign banks. The major contribution to the overall revaluation gains was from the depreciation of the yen against the dollar.

Published in Dawn, April 9th, 2017