Forex reserves still not at comfortable levels

$14.12bn of foreign exchange can cover only 3 months of imports

Saturday, November 21, 2009
By Mansoor Ahmad

LAHORE: A year after the approval of a huge $7.6 billion bailout package by the International Monetary Fund, Pakistan has not been able to increase its foreign exchange reserves to comfortable levels and they are still vulnerable to external shocks like a sharp rise in crude oil prices.

Out of total foreign exchange reserves of $14.12 billion claimed by the State Bank, the central bank actually has only $10 billion at its disposal while the remaining amount is depositors’ money kept in commercial banks. With an import bill of around $35 billion per annum, these reserves would hardly cover cost of three months of imports.

During the last 12 months, the economy did not really pick up. Foreign exchange reserves did not increase to ideal levels despite the fact that prices of crude oil dropped by 50 per cent, easing pressure on the reserves.

However, remittances rose to $7.4 billion in the past year, providing a chance to the economic managers to accumulate foreign exchange. Besides, the IMF has until now provided over $5 billion to Pakistan while the US and other friendly countries have also chipped in with around $3 billion since November last year.

The increase in foreign exchange reserves has all been due to outside factors. Economic policies of the government seem to have no role in this regard. The manufacturing sector’s growth is still close to zero. Exports are declining while unemployment has probably crossed 9 per cent from 7.4 per cent last year. Poverty numbers are also on the rise.

The policy-makers are perplexed as things are not under their control. Unless the economy moves at the micro level, they would not be able to achieve any of their targets.Evidence has shown that countries with high foreign exchange reserves have sustained ups and downs in the global economy with more ease than countries like Pakistan which have very low reserves.

China, for instance, foots an import bill of $1.56 trillion but it has no worries because it has foreign exchange reserves of $2.30 trillion which could finance its import bill for 24 months. Chinese exports are strengthened by the stability of its yuan currency which is pegged to the dollar and keeps its exports cheap. Chinese exports are higher than its imports.

India’s foreign exchange reserves of $285 billion are enough to finance 12 months of imports. India has tried to keep its currency weak in order to support the export sector, though the central bank has allowed the Indian rupee to appreciate against the dollar by 14 per cent since January 2009.

India faces a high trade deficit which is covered by huge foreign investments and high worker remittances. India, in fact, is the largest recipient of worker remittances in the world which have reached around $50 billion annually.

Foreign exchange reserves are maintained by countries all over the world to defend the value of their currency, and hence, they act as a buffer against external shocks. They enhance a central bank’s ability to manipulate exchange rate, usually to stabilise it and create more favourable business conditions for exports and imports. Large reserves also increase a country’s creditworthiness. However, maintaining big reserves is not without cost, which is often unavoidable but prudent managers cope with it intelligently.