Japan suffered decade long
recession even having the biggest foreign exchange reserve on the earth
By ALI FARHAN
CHAUDHRY
July 08 - 14, 2002
Persistent rise in Pakistan foreign exchange reserves
made diplomats and economists satisfied and now concerned either the
reserves would be able to kick back the economy or not. But before going
into details one should be clear minded that whether these reserves are
generated by economic activity or with the help of other means such as
dollar buying from the open market, increase in the remittances, or by
rescheduling of debts or grants from the IFIs (International Financial
Institutions). Another area that helped to increase the foreign exchange
reserves is the persistent narrow down in the open market premium that
inclined the Pakistanis living abroad to remit through banks rather than
other means like hundi. According to the SBP's Q3-2002 report the
current account surplus jumped to US$2.1 billion during Jul-Mar FY02
versus the deficit of US$82 million in the corresponding period last
year. This improvement is basically achieved due to low oil and sugar
prices. Pakistan foreign exchange reserves have increased to US$5.6
billion (June 08, 2002) that is a good achievement in numbers because at
one time in year 1997-98 reserves were recorded historical low at US$930
millions. The persistent gains in the foreign exchange reserves speeded
up after September 11 when Pakistan joined international community in a
war against terrorism. Subsequently most of the creditors either wrote
off or rescheduled Pakistan's debts e.g., Paris Club rescheduled our
debts. And even some of the countries like the United States compensated
Pakistan for the losses that occurred as the front ally in the war
against terrorism. So, it is estimated that the United States has
granted more than one billion dollar and also rescheduled Pakistan's
loans.
Consequently, reserves mounted because Pakistan only
had to pay for oil out of its pocket and for the time being exempted
from debt payments after rescheduling. It was noted that rupee
appreciated more that six per cent in the same tenure and also forced
the State Bank of Pakistan to buy from the inter-bank market for
payments and also to increase the reserves.
Here another area should be discussed reserves are
also looking so high because the export and import activity remained
sluggish especially after September 11 when many nations either
cancelled our export orders or held for the time being. So, as a result
the demand for dollar diminished from the importers. Now come to another
area that in real sense supported to build up the foreign exchange
reserves is the remittance that jumped sky highs in the first ninth
month of FY 2001-02. The remittances skied high as the result of steps
taken both by the SBP and the present government that ensured safety of
foreign currencies account holders. The public has lost confidence
especially when the foreign currency accounts were frozen in May 1998
after the nuclear tests by Pakistan.
The SBP implemented free-floating exchange rates in
the inter-bank market and also took some concrete steps to smooth the
operations in the open market. They have chalked out a plan to form the
foreign exchange companies, which would be the biggest source to capture
the remittances.
Pak rupee appreciated and foreign exchange reserves
increased especially when the global community did their best to trace
the funds flows and targeted Dubai. At that time Central Bank of Dubai
imposed some restrictions and after that most of Pakistani exporters
repatriated money to homeland.
From above discussed area a person with slight
concentration can draw that whatever was the discussed means, the
foreign exchange reserves were not built up through economic activity,
and at the same time these reserves would not be consumed to fulfil debt
payments. So, now, only better planning to pay the foreign debts that
are projected to fall US$2.0 billion in FY02 compared to the FY00 figure
of US$37.9 billion and ways to generate economic activity can stabilize
path to the recovery. Any wrong step or illusion can dampen economic
activity because better picture of foreign exchanges reserves alone
can't change the fate of the nations; like Japan suffered decade long
recession even having the biggest foreign exchange reserve on the earth.
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