The present government believes that the strong economy of Pakistan is the most effective deterrent against all types of external aggressions. Therefore, all the policies aim at reducing the dependence on foreign assistance, providing impetus to accelerate the GDP growth rate and making locally produced goods uncompetitive in the global markets. The biggest achievements has been the hike in foreign exchange reserves, now exceeding US$ 7.54 billion.

Some of the critics still do not believe that Pakistan has attained a level which never looked achievable. They suspect that it is simply a jugulary of figures. Some others say that high reserves have not brought any change for the common man. Only a small group raises a pertinent question, will Pakistan be able to sustain this level as well as the rate of increase in reserves in future? While the first two opinions are based on the pessimistic attitude with which the nation as a whole has been suffering, the third demands reviewing the recent past and the emerging future trends.

Going forward, it is necessary to compare the performance of Pakistan's economy in the post September 11 era viz a viz developed countries. While even the most developed countries witnessed reduction in GDP growth rate, increase in unemployment and hike in level of uncertainty, Pakistan posted better performance, compared to previous years. One of the factors attributable to this was the growing forex reserves. To start with, higher level of foreign exchange reserves kept the exchange rate stable, rupee emerged stronger. There was hardly any cost-pushed inflation. Local manufacturers managed to boost exports. Manufacturing facilities achieved better level of capacity utilization.

Those who suspect the authenticity of the data must refer to periodical reports of State Bank of Pakistan released over the last 32 months. The central bank did not hesitate in disclosing that the country had US$ 995 million foreign exchange reserves in October 2000. For the first time in its annual report of 1999-2000 the central bank gave the comprehensive details of external debts as well as the details of reserves held by the central bank and commercial banks. It was also reported that on September 10, 2001 the total foreign exchange reserves were 3.2 billion. Since the gradual increase was reported consistently, there should not any reason about the authenticity of data.

As regards the impact of high foreign exchange reserves on the common man, one should try to visualize the scenario without such a high reserves. Since the middle of nineties, there existed the potential threat of Pakistan's default with regard to debt servicing. To avoid the default country was forced to borrow more and more funds at stringer terms. Had the country not achieve modest level of foreign exchange reserves, it would have been forced to borrow more, exchange rate went up and debt servicing increased in rupee terms. There would have been cost-pushed inflation which would have resulted in erosion of competitiveness of local manufacturers and reduction in exports.

It is important to clarify an opinion that Pakistan's foreign exchange reserves have swelled only because the country chosed to join war against terror. It is true that this decision has helped in withdrawal of economic sanctions, reprofiling of external debts, and greater access to European market. During financial year Pakistan paid US$ 6 billion towards debt servicing, about 40 per cent of the total exports. This was despite that there was a reduction of US$ 1.5 billion in debt servicing.

Critics say that a large part of the reserves was accumulated through purchase of dollars, by the central bank, from the kerb market. Pakistan needed US$ 3.756 billion during 1999-2000 and US$ 5.101 billion during 2000-2001 for debt servicing. It had two options: either to acquire more loans or to buy dollars from the kerb market to discharge this liability. It was difficult decision but the government decided to buy dollar from the kerb market. On the one hand this helped in keeping the exchange rate stable and on the other hand, avoiding increase in debt servicing quantum.

The most important point to consider is, will Pakistan be able to increase its foreign exchange reserves in the future? This largely depends on the policy adopted by the next elected government. The present government has abstained, so far, from using the foreign exchange reserves for pseudo development projects initiated by the previous governments. It has mainly concentrated in initiating market-based policies and bringing structural changes.

Therefore, it is suggested that future government should not initiate economically unviable projects to achieve political mileage. If any effort is made to achieve political mileage by using these foreign exchange reserves, the country may once again face the potential threat of default.