Foreign exchange report card

FY12 was a tough year for the State Bank of Pakistan in managing the foreign exchange reserves. It wasn an easy task in the days of worsening balance of payments to manage the reserves and keep the currency steady. The rupee depreciated against the greenback by 10 percent last year and the SBP couldn do much as its liquid reserves were heavily battered. Net reserves with the SBP fell by $3,984 million (27 percent) in the last fiscal year to a mere $10,799 million, shrinking the import cover further from 4.4 months to just 2.9 months. On the other hand, net reserves with commercial banks kept on growing at a healthy pace -increasing by $1,025 billion (30 percent) in the last year to reach $4,485 billion. This pattern is in contrast to the past three years in which the SBPs reserves cumulatively grew by 72 percent, thanks to the IMF programme, while commercial banks reserves stagnated. Its not a good sign for an economy prone to balance of payment crises to have its foreign exchange playing in private hands, with limited control of the central bank. It shows the lack of trust and interest of an average private saver in keeping his/her surplus cash in rupee; one would rather have created deposits in foreign currency. On the flipside, its a sign of growing confidence of people on the banking system in that they keep their foreign currency accounts with commercial banks. This was at the lowest ebb after the freezing of FE25 accounts in 1998 in the aftermath of the nuclear test. People do not expect the current government to take such an erratic measure now. Nonetheless, these reserves cannot be used to safeguard from any exogenous shock like a 2008-like oil price scenario. There is a dire need to build up SBP reserves to avert the pressures of upcoming IMF payments and to have an inherent hedge against the volatile global economic situation. Back in 2008, in the crisis time, SBP reserves were left to a mere 1.5 months of imports; Pakistan is not too far from that level currently. And the composition of foreign reserves also exposes its fragility, as Pakistan has even less than a months import cover if seen without the IMF money and Chinas and KSAs parked reserves. That said, the restoration of Nato supply line may still be reason enough for the US to pump enough oxygen in Pakistans economy for another two to three quarters.