Foreign Exchange Reserves

Every now and then we hear about our foreign exchange reserves reaching a record high or low, though with not much interest. During a recent visit to the USA, our finance minister Abdul Hafeez Sheikh proclaimed “Pakistan can meet its debt repayments obligations while maintaining foreign exchange reserves of over $16 billion “. A surprising statement considering the shortage of funds at home to provide basic necessities such as electricity and transportation (we all know current status of PIA and Pak Railways). One would ask what is this foreign exchange reserve (or simply forex) actually is and is it of any importance?
Well, put simply, it is the ability of a country’s state bank to pay for its monetary obligations. Simple isn’t it but these obligations are not necessarily debt repayments, rather these include payments against everything and anything that is either purchased by the government or an individual of that country in international market. The “foreign exchange reserve” is the ATM machine they go to to withdraw required amounts. It consists of a pool of major currencies and in Pakistan’s case it is primarily US dollars, pound sterling and euros.
Major sources of fore are foreign direct/in-direct investment by multi-national organisations (very rare these days), remittances by expatriates around the world (the largest source of foreign exchange income in pakistan), foreign loans (also one of the major contributor to our foreign exchange reserve) and foreign aid (either humanitarian or development aid).
Foreign exchange reserves are also dependent upon trade. A country with a trade surplus enjoys more economic independence and eventually more political freedom, able to work and device its policies autonomously and achieve goals and objectives. Whereas in case of trade deficit, the difference is covered up with loans from “friendly nations and financial institutions” such as USA, IMF and World Bank, which feed corrupt leadership to their own agendas and exercise influence from foreign policy to increase in electricity tariffs (prime example is of Pakistan). As of today, our foreign exchange reserves are over Rs17 billion and exceeded the $18 billion mark in August for first time in history. On the contrary, our reserves were around $8 billion back in 2008 due to capital flight after the assassination of Benazir Bhutto and political turmoil that followed under President Musharraf. It seems a remarkable performance by our current government, boasted every now and then by our finance minister, but raw figures not necessarily show the true picture.
The huge increase in our foreign exchange is primarily due to additional loans taken by our elected government immediately after elections. The result is gradual increase in prices of electricity and petroleum and a gradual decrease in subsidies, all on the advice of our friends at the IMF. Secondly, the magnanimous increase in foreign exchange is due to huge foreign aid that we received after the devastating floods in Punjab and Sindh last year, total approximation of which is still questionable and damage due to heavy rains this year shows that no preventive measures were taken by our government during the past year. Thirdly, the spike in international cotton prices bid up prices of our textile goods, a good 70 per cent of our exports, enabling us to bridge the trade gap. The same amount of exports is not at all expected this year, reason being torrential rains in lower Punjab and Sindh caused loss of approximately 1.5 million bales of cotton and severe energy crisis, which are forcing not only international but also local investors to move to Dubai, Bangladesh and Sri Lanka, with energy security and better incentives.
So, instead of making blank statements in US or back home, our finance ministry needs to manage current reserves extremely cautiously instead of fulfilling one obligation with another loan from IMF, provide incentives such as tax breaks and discounts on export oriented industries, make sure availability of electricity and gas to industry and protection of foreign investment from any political or economical turmoil and finally document, evaluate and invest purposefully foreign aid received from international donors. If we continue to avoid such measures, it won’t be long before we hear of yet another delegation of IMF visiting Pakistan to advise on measure to ensure economic stability and development.

The writer is a freelance journalist and economic researcher. He can be reached at [email protected]