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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.