Foreign reserves have long played a pivotal role in determining the economic stability of Pakistan. Many a times in recent decades, alarm bells have been sounded for dangerously low levels of foreign reserves.
For import led economies, foreign reserves are the barometer for economic health. Pakistan relies heavily on oil and petroleum products and a variety of finished goods to sustain the productive capacity of its industry and the lifestyles of its residents.International crude oil prices play a central role in determining the pressure of imports in the economy. There is a strong positive correlation between the price of oil and the volume of imports in the country. When oil prices rose to $133 a barrel in June 2008, imports were up 45 percent over the previous year, despite a slowing demand.
Amidst a deteriorating reserves position, IMF stepped in to help Pakistan out of troubled waters. The country has made progress in broad areas of economic development. Foreign reserves are up $7.8 billion since the intervention. According to the latest data released by the central bank, Pakistans foreign reserves today stand at $14.9 billion.
The metric for import sustainability is named import cover. Essentially, it counts how many months of imports are covered by the reserves at any point in time. At this point Pakistan stands at a healthy six and a half months of imports based on its reserves.
However, its not all so simple. A sizeable chunk of Pakistans foreign reserves, $5.7 billion to be more specific is money that the IMF has lent for balance of payment support. This money is supposed be phased back to the donor once Pakistan exits the IMF programme in the upcoming fiscal year, unless the programme is renegotiated.
This development will reduce the import capacity of Pakistan down to three and a half months. When the fund stepped in to help the domestic economy, this measure could be quantified at a little over two months.
Foreign investment has traditionally helped strengthen and stabilize the reserve situation in Pakistan. The unstable law and order situation has sparked a net outflow of investment in the country in the current fiscal year. Pakistan must work on improving the working and investment conditions for foreign companies.
In the boom years of this decade, much of the foreign investment had come in the telecom and financial services sectors. Those sectors are saturated now. Energy investment is where the future lies for investors in Pakistan.
Investment in the energy sector must include development of indigenous resources. This will help the country reduce its reliance on imported oil, reducing the current account deficit while improving the import cover.
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