Foreign reserves

At the end of April State Bank of Pakistan (SBP) announced that Pakistan's foreign currency reserves were around $17 billion. Given the slow economy, the dip in imports, and the healthy flow of foreign remittance, the reserves look very impressive and healthy. And they are more than enough to hold the exchange rate steady and signal to the market that Pakistan is good for doing business and there is no reason to worry about payments and coverage of liabilities (the purpose of keeping reserves).
But the complete picture is not really that rosy and clearly it does not gel with the larger picture of the economy as well. We need to breakdown the reserves story a bit. Of the $17 billion, SBP reserve is $13.7 billion. $3.4 billion odd of foreign currency reserves are with commercial banks and these are not available to SBP for paying off liabilities. Yes, that amount is within Pakistan, but these are deposits of citizens, residents, and company holdings and so on and unless government does another nationalisation (with consequences of its own) clearly this money is not available to the SBP for any purpose.
But more importantly, of the remaining $13.7 billion, about $9 billion is money that we have borrowed from the International Monetary Fund (IMF). IMF money cannot be spent. It is supposed to be just parked in State Bank and that is about it. It gives comfort to markets, it signals to the world that IMF considers us good enough to lend to, and it allows other lenders to have confidence. But it is not money that the State Bank can use to pay off liabilities. And, even more importantly, we have to start paying back this money from next year. So, should we think of our reserves independently of these $9 billion odd?
When we were in a lot of financial trouble back in 2008 or so we had requested help from 'friends of Pakistan'. Not much had come through. But and though this is not confirmed sources inform me that Saudi Arabia and China had come to our assistance by making their central banks park some of their foreign currency reserves with SBP. Again, this is not our money, we cannot spend it, and of course we have to give it back. But it was done just to help up by bolstering our reserves and instilling some confidence in international lenders. It seems that each country had parked around $1.5 billion with the State Bank.
Out of the $13.7 billion that the SBP holds as foreign currency reserves, it seems that around $12 billion is actually either borrowed money that is becoming due soon or is money we cannot really spend to settle liabilities but is parked in the bank just to boost confidence of international markets and allow transactions to go on. Which leaves us with only $2 billion or so as our actual reserves. This is money (if there are no other deposits of the sort mentioned) which we can use for transactions, for making promises and for settling liabilities. The situation is not too different from the one we were in 2008. Except that in some ways it is much worse. We already have about $9 billion loan from the IMF that we have to start paying back soon. And the world seems even less likely, compared to 2008, to bail us out.
One big question here is and should be: how should State Bank of Pakistan report on reserves. Should it make the figures more transparent and give breakups: how much is loans, how much is what other banks and institutions have placed with the State Bank and how much is what we can use to actually settle liabilities and pay for imports.
All this is happening while foreign remittance flows are at record levels and our imports are down due to the downturn in the economy and the resultant slow growth. This is what is really allowing us the breathing space that we are seeing right now and is also keeping the exchange rate steady. If the current balance is perturbed in any way, say the economy starts to grow (though not very likely in the short run) or the oil prices rise further and our import bill goes higher, if we do not get another IMF programme and we have to pay back the amount we currently have from them, if other countries want their money back or if we do not get another bailout of some sort, the balance we have now is not going to be able to withstand any of that.
The issue of remittance also needs some deeper thinking and scrutiny. What sort of money is coming in the form of remittance, from where, and for what purpose? Right now, given our financial situation, we do not ask any questions about the sources of remittance and purposes. But we need to understand these. It could very well be 'hot money' coming as remittance. But this could be quite bad for the economy. Hot money can flow out of the country almost as easily as it comes in and sometimes very quickly as well. But that is a topic for another article.
The 'record' or high foreign reserves rhetoric that we find in the country right now is based on really shaky premises. We do not have much foreign reserves in actuality if we take away amounts that we have borrowed and are scheduled to start paying back quite soon, and amounts that other central banks have 'parked' with SBP. The reserves that we can use for payments and for settling liabilities are much smaller. We need to rethink macroeconomic stability issues more seriously.