Then and now

When Pakistans forex reserves hit the then-record of $16.5 billion in FY07, there was immense optimism; stakeholders, especially capital market pundits, passed cellular SMSs with a sense of euphoria that sagged rather drastically in the aftermath of the balance of payments crisis in October 2008.
Today, foreign exchange reserves have hit a new record high (of $17.1 billion), but that jubilation is nowhere to be seen. In fact, if there is any dominant feeling, its the feeling of despair. Thats probably because the composition of reserves between then and now is quite different.
Back then the reserves were mostly supported by rising foreign direct investment, including privatization inflows. Today, both are predominantly absent. And there is little hope that these inflows would materialise anytime soon, thanks to rising security risks, saturation of financial and services sectors, and so on and so forth.
Plus, unlike 2008 when dollars flew out of the country in a jiffy, today the stakeholders know the due date of dollars flight i.e. when the repayment of IMFs moneys - scheduled to really kick in by 2012, when $2.4 billion is due to be returned - will begin gnawing on the countrys reserves.
The feeling is somewhat similar to that of a man who knows the time of his death; quite naturally, there can be little excitement even if he wins a 100-metre sprint. In economic terms, the looming debt trap, and the odds of running into another IMF programme are enough of a sentiment dampener.
A similar façade is being raised at the Karachi Stock Exchange. Like the forex reserves, KSE-100 index is flirting with new highs (though not record highs).
At 10,700 points, it is reminiscent of the pre-crisis world. But that old feeling is nowhere to be seen; most participants are cautious.
And they have all the right reasons to be wary. Both inflation and inflationary expectations are running high, bond yields are on the rise, credit supply is tight, and the trend in LSM growth is direction-less and fragile amidst a variety of bad news sporadically emanating from Islamabad.
For KSE, the presence of foreign investors and selected local investors, who have cornered a few big stocks, may mean further northward movement - but one that is edgy and fundamentally skewed towards the downside.
For reserves, remittances are the key factor. In a ceteris-paribus world, the higher the dollar inflows by non-resident Pakistanis (NRPs), the higher would Pakistans reserves be - at least for a short while.
But in both these cases, of KSE and of forex reserves, further rises cannot be seen as signs of growth. In fact, if anything, let these two be a textbook example of how some macro economic indicators can often be misleading.