why does a nation need forex reserves

ISLAMABAD - Prime Minister Shahid Khaqan Abbasi is likely to seek support from China during his upcoming visit to Beijing to sustain the depleting foreign exchange reserves of the country. "Prime Minister will visit to China within this month where he may look for Chinese assistance that can be in shape of parking some amount in central bank of Pakistan," said an official of the Ministry of Finance. He further said that government desperately needing $3 billion to finance the previous loans and current account deficit before June this year. "The government can request the Chinese government either to provide some loan or to keep money into State Bank of Pakistan for some time in order to build Pakistan's foreign exchange reserves," he said. Reserves held by State Bank of Pakistan (SBP) are sharply depleting from last one and half year and reached to $11. 8 billion last week. The official informed that government has another option of borrowing from the commercial banks. Pakistan had already borrowed $1. 78 billion from the commercial banks during eight months (July-February) of the current fiscal year.


The government had projected only $1 billion borrowing from the commercial banks during the entire ongoing financial year. However, the government had gone beyond the limit in just eight months to sustain its foreign exchange reserves. China had already given a loan of $1. 1 billion to Pakistan during eight months (July to February) of the current fiscal year. China had pledged to give loan of $1. 6 billion to Pakistan during ongoing financial year. However, Pakistan would seek additional assistance then the aforesaid budgeted amount. Meanwhile, the government has also an option to tap international capital market before issuing Eurobond to raise at least one billion dollars. Pakistan in November last year had successfully executed $1. 0 billion five years Sukuk and $1. 5 billion ten years Eurobond transactions at a profit rate of 5. 625percent and 6. 875 percent respectively. The order book for Pakistan's sovereign papers was over $8 billion. However, the government decided to pick up only $2. 5 billion in order to ensure low final yields on the Sukuks and Eurobonds. Pakistan's current account deficit is expected to widen to $15. 7 billion (4. 8 percent of GDP) this year.


The government would need loans to finance this deficit. Pakistan had already borrowed $7. 6 billion during eight months (July to February) of the ongoing financial year increasing the overall external debt of the country. For the current fiscal year, the government had estimated to receive $8. 094 billion in foreign loans, including $7. 692 billion loans and $401. 78 million grants. However, the government borrowed 94 percent only in eight months, which indicate that government would break the previous year's record of borrowing around $10 billion in a single year. The IMF has projected that Pakistan's external debt would increase to $103. 9 billion by June 2019 from estimated level of $93. 3 billion of June 2018. Similarly, the IMF in its report stated that external financing needs are expected to rise from $21. 5 billion (7. 1 percent of GDP) in FY 2016/17 to around $45billion by FY 2022/23 (9. 9 percent of GDP).
This is post 1 of 2 in the series Record Forex Reserves in Asia: A Buffer for US Monetary Tightening The US dollar has been weakening since late 2016.


The PowerShares DB US Dollar Index Bullish Fund ( ) has declined 8. 1% on the year while the PowerShares DB US Dollar Index Bearish Fund ( ) is up 8. 3% in YTD 2017. This weakness has been a boon to emerging markets in more ways than one. Emerging markets have been tapping international markets with bond issuances and, allowing them to raise money at lower rates than normal. Emerging market bonds denominated in local currencies their hard-currency peers, and central banks have seen their international reserves swelling. Impact on Asia The graph above plots the top 10 Asian nations in terms forex reserves at the end of 2016. Reserves held in gold or as Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) are not part of the numbers presented. The first six countries are also among the worldвs top 10 markets in terms of forex reserves with China and Japan being the top two on that list by a significant margin; Switzerland is a distant third. Given that Asia dominates the emerging markets landscape, the impact of a weak dollar has benefitted developing countries from the continent substantially.


Strongest on record The graph below plots the top five emerging nations from Asia which have seen their forex reserves rise to record levels. The graph shows growth in international reserves over the past 12 months as well as their level. Including gold reserves, Indiaвs forex reserves have crossed the $400 billion mark for the first time in its history. Indiaвs imports had stood at $384 billion in fiscal year 2016-17 (Apr-Mar) according to Ministry of Commerce data. This equates to India now having enough international reserves to cover a yearвs worth of imports. For Indonesia, its total forex reserves stood at $128. 8 billion in August, and according to Bloomberg, this is enough to cover 8. 6 months of imports and government external debt repayments. Building these reserves could be of great benefit to emerging Asian countries in the near future. We ll explain how in the next article. This is post 1 of 2 in the series Record Forex Reserves in Asia: A Buffer for US Monetary Tightening

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