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EDITORIAL: Total foreign exchange reserves held by the State Bank of Pakistan (SBP) further declined to 3.08967 billion dollars on 27 January 2023 from the 20 January 2023 figure of 3.678 billion dollars. International institutions, including the International Monetary Fund, and economists define foreign exchange reserves as foreign currency assets held by the central bank irrespective of Finance Minister’s 8 January 2023 inaccurate claim from the perspective of economics that the country’s foreign exchange reserves were 10 billion dollars and not 4 billion dollars as 6 billion dollars held by commercial banks also belong to the country.

This statement spread panic that the government maybe considering freezing the foreign currency accounts held by commercial banks, a flawed decision that the PML-N (Pakistan Muslim League-Nawaz) government also took in 1997 after the nuclear blasts, prompting the finance minister to ease concerns though he insisted on repeating the error: “national foreign exchange reserves always include forex held with SBP and commercial banks. Recently I quoted the forex reserves figure based on this principle.

Some vested interests who ruined this country’s economy in the past, gave it a deliberate twist and started a campaign as if the government was considering an access to foreign exchange held with commercial banks which indeed is the property of the citizens. It is categorically denied and clarified that no such move is under consideration of the government.”

Low foreign exchange reserves today are not only limiting the country’s capacity to purchase fuel but are also the reason behind administrative measures that account for the inordinate delays in opening letters of credit for even those imports defined as critical, repatriation of profits as well as payment to foreign airlines as well as the piling of containers at Karachi port which are accumulating demurrage.

History indicates that the last time foreign exchange reserves were so low was in November 2013, when the PML-N was in government and Dar the country’s finance minister.

On 22 March 2013, a few days before the PPP-led government’s tenure was over foreign exchange reserves held by the SBP were 7.2 billion dollars. Thence began a decline to a low of 3.176 billion dollars on 24 January 2014 which was strengthened by 18 April 2014 to 7 billion dollars – an amount that was partly due to the 1.5 billion dollars gifted by the Saudi government and partly due to the policy thrust by the then economic team leaders to increase reliance on borrowing from abroad, on the rather economically weak argument that the interest rate was cheaper abroad, at around 6 percent or so, due to the ongoing global recession relative to the domestic market, at around 12 percent.

This decision ignored the two major arguments put forth by economists at the time advising against this policy notably: (i) domestic debt is more easily managed as the country has the option to print more money; and (ii) the natural annual rupee erosion, estimated at about 3 percent at the time, that would have automatically increased debt servicing payable in dollars in the budget was not allowed by intervening in the market through dollars that were procured from borrowing.

The result was disastrous then and the outcome is not expected to be different whenever such flawed policies are implemented.

It is extremely disturbing that the current economic team leaders opted to follow the policy of an over-valued rupee (till 26 January 2023 when it was realised that the IMF will not schedule a visit unless this policy was reversed) and this time without adequate foreign exchange reserves which are no longer as easy to procure as in 2013-14 due to Pakistan’s changed geopolitical situation as well as the refusal by our erstwhile lenders, particularly Saudi Arabia, to continue to extend assistance to any country without the recipient country bothering to implement reforms that would mitigate the need for future assistance.

We would, therefore, urge the government and the 70 plus cabinet members to become more proactive in evaluating economic policies and to make appropriate suggestions as the onus of these flawed decisions is not only being borne by the general public but would also have to be borne by all coalition partners in the forthcoming elections.

Copyright Business Recorder, 2023


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John Feb 08, 2023 08:46pm
Crooks & Corrupt Inc have leveled the economy! Total incompetence is leading the country towards a total economic disaster! And these clowns are diverting public attention by arresting politicians! The generals should be ashamed of what they did to the country by bringing these crooks to power! Enough is enough!
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