UAE intends to park $3bn in Pakistan’s SBP

UAE’s financial assistance comes at a critical juncture after the central bank received its second tranche of $1 billion from Saudi Arabia last week

KARACHI: The United Arab Emirates (UAE) intends to park $3 billion in Pakistan’s central bank “in the next few days.”

Abu Dhabi Fund for Development (ADFD) in a statement on Friday said it will deposit the amount in the next few days and the deposit is aimed at boosting liquidity and monetary reserves of foreign currency at the central bank.

ADFD has financed eight development projects in Pakistan with a total value of AED1.5 billion, including AED931 million in grants.

These funds have covered projects in sectors such as energy, health, education and roads.

On Thursday, State Bank of Pakistan (SBP) reported its forex reserves increased by 10.74% week-on-week (WoW), breaking a two-week losing streak.

The reserves had nosedived to a four-and-a-half-year low, which raised questions about Pakistan’s ability to meet its financing requirements.

However, the financial assistance from the kingdom has helped pushed the reserves above $8 billion.

Overall, liquid foreign currency reserves held by the country, including net reserves held by banks other than the SBP, stood at $14,584.5 million. Net reserves held by banks amounted to $6,536.2 million.

Finance Minister Asad Umar has repeatedly stated that he has arranged for funding from bilateral sources to plug the external financing gap.

He stated several economic measures taken by the government would contribute to a decrease in the current account deficit by $6 to $7 billion in FY19 compared to FY18.

In October, Saudi Arabia had agreed to give $3 billion for a year to Pakistan for averting a balance of payment crisis.

Also, it agreed to extend a one-year deferred payment facility for oil imports to Pakistan worth up to $3 billion.

The agreement was reached when Prime Minister Imran Khan visited Riyadh to attend the Future Investment Initiative (FII) Conference.

In a comment to Profit, Arif Habib Limited’s Head of Research Samiullah Tariq said, “I think UAE’s decision to park $3 billion with Pakistan will improve its bargaining power with the IMF.

We believe the government would be able to manage the balance of payments for the remaining year.”

Going forward, Pakistan needs to increase its exports of value-added products to reduce its trade deficit, said Mr Tariq.

In addition, Pakistan needs to tighten its control over money laundering and encourage remittances via official channels, he explained.

He added, “These steps will reduce Pakistan’s reliance on foreign funding and control its current account deficit.”

Last week, Fitch downgraded Pakistan’s rating to B- but maintained the outlook at stable citing fiscal deterioration.

The rating agency projected high gross financing needs, with an expected narrowing of the current account deficit which will be counterbalanced by higher external debt service payments compared to last year.

Fitch highlighted sovereign-debt service obligations over the next three years stood at $7 to $9 billion per year, which includes a $1 billion Eurobond repayment due to in April 2019.

In a separate report released by Moody’s last week stated the country’s external debt repayments are modest, however, low foreign exchange reserves adequacy could endanger the government’s ability to finance the balance of payments deficit and roll over external debt at affordable costs.

It highlighted due to a lack of capital inflows, the coverage of forex reserves for imports would remain below two months, which was below the minimum adequacy level of three months required by the International Monetary Fund (IMF).

According to Moody’s, the country’s debt structure slightly lessens the risk of low reserve adequacy.

Around a quarter of the repayments (principal plus interest) are owed to eurobond and sukuk holders and about another quarter due to commercial banks.

It highlighted over 50% of repayments are due to multilateral or bilateral sources, where the chances of refinancing are notably greater.

The rating agency said Eurobond and Sukuk repayments for the remainder of FY19 stood around 15% of reserves as of the end of FY18, including commercial loans would increase the percentage to around 40% stated absent capital inflows, forex reserves adequacy would remain low.

It cautioned the governments’ ability to refinance foreign currency debt at affordable costs, although public sector external debt repayments, especially commercial debt repayments are reasonably modest.

The rating agency stated Saudi Arabia’s balance of payments support amounting to $6 billion split between deposits with the SBP and a deferred payment facility for oil imports would partly reduce this risk.

 

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