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Foreign exchange reserves: An overview

Foreign exchange reserves are significant assets of any country because they are importantly affected by exchange rate policy, regulations, monetary policy, external unrest and the impact of the shortages that may come from the economic environment of any state. Without the sufficient reserves the government may be forced to change the trade and exchange rate strategies, which may not be in the long run interest of the country. Accumulation of foreign reserves involve two kinds of costs, the adjustment cost and opportunity cost and we cannot say holding utmost level of reserves is helpful for the economy.
When accumulation of reserves exceeds the optimal level, it explains the inefficient allocation of resources.res1-gph1

Researchers mention in different studies that there are various causes for a poor developing country to accumulate reserves. First, reserves are utilized as a tool of exchange rate and monetary policy management. The inter-bank market is utilized to affect monetary policy by either supplying local currency to the market or buying it in the market against foreign currencies. This affects the local money market balance and so domestic interest rates. In Pakistan where the foreign exchange market has been liberalized the State Bank of Pakistan (SBP) intervenes to affect the rate at which rupee trades. The objective of a stable, realistic exchange rate which does not erode the competitiveness of Pakistani exports can only be realized if the State Bank of Pakistan has sufficient reserves and can intervene at times to achieve this objective. Second, reserves offer funds in foreign currencies for servicing external debt and liabilities. Third, in case of Pakistan, reserves are held as a defense against unforeseen emergencies or as a cushion against unanticipated exogenous shocks. Fourth, in addition to enhancing liquidity in foreign currencies high level of reserves also contribute to the creditworthiness of the country. By repaying most of its expensive commercial and short term liabilities during previous years, Pakistan has enhanced its debt indicators.

 

Presently, foreign currency reserves held by the State Bank of Pakistan (SBP) were registered at $12,660.5 million on November 30, 2017, down $886.8 million as against to $13,547.3 million in the previous week. The fall in foreign reserves was attributed to external debt and other official payments, a development that increases concerns over looming obligations on an already burdened on our economy.

 

The total, liquid foreign reserves held by Pakistan, counting net reserves held by banks other than the State Bank, reached at $18,744.9 million. Net reserves held by banks amounted to $6,084.4 million. However, because of present situation of reserves’ level, SBP was quick to add that on December 5 it received $2.5 billion as proceeds from Pakistan Sovereign bonds and Pakistan International Sukuk, after which its reserves reach at $14,883.1 million, and total liquid foreign reserves are up at $20,986.4 million.

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The Government of Pakistan presently boosted $2.5 billion by floating dollar-denominated sovereign bonds in the foreign market in a bid to shore up official reserves. A few months ago, foreign currency reserves also surged because of official inflows counting $622 million from ADB (Asian Development Bank) and $106 million from the World Bank (WB). Earlier, SBP received $350 million under CSF (Coalition Support Fund) and made payments of $62 million for external debt servicing. In January, the SBP made a $500-million loan repayment to SAFE (State Administration of Foreign Exchange), China.
Economists and businesses have been urging the government to devalue the rupee, saying it was hurting exports and contributing to the depletion of Pakistan’s foreign currency reserves. The State Bank of Pakistan mentioned that a weaker rupee would help the economy grow and ease balance of payments pressures.

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