May 10 - 16, 2004





The country's foreign exchange reserves have already exceeded the target of $ 12 billion set for the fiscal year ending on June 30, 2004. According to latest figure released by the State Bank of Pakistan reserves have reached about $12.5 billion on April 30 despite the fact that the country paid about $ 1.4 billion of expensive loans before becoming due because the same carried a higher rate of interest. This is an all time high record in country's history.

The government has taken a policy decision for premature retirement of all expensive debts of about 10 billion dollars specially obtained from the international monetary fund at penal rates of interest of about 10 percent and above. Keeping a reserve of 12 billion dollars, which is sufficient to meet our 10 to 11 months of imports requirement, all excess amount will be used for this purpose.

Besides prudent economic policies of the government this phenomenal increase in forex reserves (presently $12.5 billion about 600 million in 1999) has been made possible because of continued rise in remittances from overseas Pakistanis which crossed $ 4 billion last year (and is expected to follow the same pace this year) as against less than a billion dollar in 1999. Expatriates are now sending home not only a part of their income to financially support their dependents in Pakistan, they are also sending some surplus as well because of enhanced confidence and new investment opportunities emerging in the country. Because of rupee stability and practically no difference between official and open marketed conversion rates, almost all the remittances are pouring in through official channels.

Because of the changed conditions on the boarder the smuggling in the garb of Afghanistan Transit Trade (ATT) has come to an end. Our trials chief under the protection of Afghanistan warlords carried out the ATT and purchased about 2.5 to 3 billion dollars annually from unofficial open and black market in Pakistan to finance such trade. As a result the conversion rate in black and official market was about Rs.5 more for a dollar than the official rate and this promoted Pakistani Expatriate to use unofficial channels for transfer of their money. This templation is no more there. For a difference of 10 to 20 paisas no-body is prepared to take a risk. Almost all of them now use official channels. This is the main reason for this phenomenal rise on our foreign exchange reserves.

Foreign exchange reserves play an important role in the country's economy. Especially these are important for financing the country's import and other international obligations as well as stabilizing the value of domestic currency. However, recently the reserves of the Asian countries have registered an extraordinary increase mainly due to the two factors. First, at the time of Asian crisis in 1997 the countries in the grip of crisis found to their dismay that the International Financial Institutions (IFIs) and especially the International Monetary Fund (IMF), due to their financial constraints, were not in a position to rescue them from this situation. Therefore, they decided to buildup their own reserves, which may work as a safeguard at the time of crisis. Secondly, after the events of 9/11 this process accelerated due to the strict rules and policies adopted by USA and other European countries regarding the money transfer. Thus, the reserves of the Asian countries increased due to increase in remittances and to some extent exports. Looking at the world scenario, the foreign currency reserves of the world increased by $ 870 billion during 1999-2003. Out of these reserves $665 billion belong to the Asian countries. Presently there are seven Asian countries whose reserves have exceeded $100 billion level. These are Japan, China, South Korea, Hong Kong, India and Singapore. Pakistan is still for behind, but there has been a significant improvement during the past few years.



In view of this encouraging indications the government has asked the State Bank of Pakistan (SBP) to work on the possibility of retiring expensive dept ahead of schedule after the country's foreign exchange reserves exceed US $ 12 billion. Another proposal being considered is that Pakistan should invest about 10 percent of its foreign exchange reserves through international investment banks.

"Retiring expensive debt before schedule has been discussed and the SBP has been asked to work out the details in this regard. Such debts would be retired from the exchange reserves available with government in excess of $10 billion", an official source told this correspondent. He said Pakistan had got a breather in terms of debt rescheduling by the Paris Club under which its bilateral debt worth $ 12.6 billion has been re-profiled, which has translated into a monetary benefits of approximately $3 billion over the years of the agreed timeframe under the Paris Club agreements.

As a matter of fact this process of retiring expensive debts has already started. Pakistan has paid SDR 44.078 million ($60.38 million) under contingency and compensatory to IMF. These are IMF expensive resources, which Pakistan has stated paying as per its policy to early repay the costly debts. Pakistan has to pay total SDR 176.35 million ($241.59 million) under contingency and compensatory of IMF. Total IMF facilities extended to Pakistan are to the tune of SDR 1.44 billion ($1.97 billion). This payment was in addition to SDR 3.158 million ($4.32 million) against Extended Fund (Ordinary Resources) and SDR 18.75 million on standby (expectation), which are normal due to repayments. According to the schedule, Pakistan also paid SDR 5.178 million ($7.09) million as charges on ordinary GRA Purchases on February 7, 2003.

Pakistan will start early repayment of selective costly loans of IMF, Asian Development Bank and the World Bank by June this year. Details in this respect are being worked out in the debt management wing of the Ministry of Finance. "Currently the country's total foreign debt liability is approximately $35 billion, of which $ 12.6 billion is the official bilateral debt being re-profiled under the Paris Club agreement, while Pakistan owes nearly $14.7 billion in debt to the multilateral agencies", the official said.

As the country's debt burden sharply increased, specially during the last two decades, the economy was burdened with a high level of debt-serving liability. At one point of time it is said to have consumed as much as two third of the total annual current expenditure. Such a high cost of servicing the debts resulted in the need for further borrowing over the years.