Are FX reserves a true indicator of progress?

LAHORE:

Can we say that an increase in foreign reserves is the true indicator of a country’s progress? We can agree to disagree here, but foreign reserves are as true of an indicator as the stock market. The lowest bracket does not benefit if these indicators indicate strength. Nor do they care much.

The strength of foreign reserves, however, can indicate the balance of payment. To say that an increase in foreign reserves creates an effect on the lives of the poorest is optimistic; but the socio-political decisions taken by politicians do affect foreign reserves. The spendings which indicate growth and development to gain support effect the payment cycles. After all, its borrowed money on which the country is operating.

Pakistan has faced balance of payments crises multiple times in the past few decades, with the most recent one occurring in 2018. The country has typically turned to the International Monetary Fund (IMF) for financial assistance to address these issues. In the 2018 crisis, the government of Pakistan once again turned to the IMF for support and entered into a $6 billion loan program with the lender.

To address the balance of payments issue, Pakistan implemented a series of reforms and policies as part of the IMF loan program. Some of the key measures taken by the government included exchange rate adjustment, tight monetary policy, fiscal consolidation, structural reforms, social safety nets etc. These measures have had both short-term and long-term effects on the country’s economy.

In the short term, these measures have helped stabilise the currency, reduce inflation, and improve Pakistan’s external balance. According to the State Bank of Pakistan (SBP), the country’s current account deficit has decreased significantly since 2018, and foreign exchange reserves have increased. This has helped reduce the risk of a balance of payments crisis in the near future.

The reforms, however, have also come with social costs, including increased poverty and unemployment, which could have long-term effects on the economy. Additionally, some of the structural reforms implemented as part of the IMF loan program, such as the privatisation of state-owned enterprises and the overhaul of the energy sector, may take time to bear fruit.

These social costs have long seen consequences. Pakistan’s foreign exchange reserves increased, which is also backed by stats; i.e. the poverty rate fell from 35.2% in 2013 to 24.3% in 2015. Pakistan’s GDP growth has been volatile in the last few years, ranging from 5.5% in fiscal year 2017-18 to -0.4% in fiscal year 2019-20. The consumer price index (CPI) rose from 2.9% in fiscal year 2016-17 to 9.1% in fiscal year 2019-20.

Pakistan’s balance of payments crisis in the recent years has been a major economic challenge for the country. The crisis was caused by a combination of factors, including high imports, low exports, and a large trade deficit. The country’s foreign reserves were severely depleted, and it was unable to meet its external financing requirements.

To address this crisis, the government and the SBP implemented various measures, including a tightening of monetary policy, fiscal consolidation, and structural reforms. One of the key measures was an increase in foreign reserves through loans from international lenders, such as the IMF and other countries.

According to the SBP, the country’s foreign exchange reserves have increased from $10.6 billion in July 2019 to $27.2 billion in January 2022, an increase of over 150%. This increase in reserves has helped stabilise the country’s economy and restore confidence in the country’s financial system.

Despite this increase in foreign reserves, however, poverty in the country has increased. According to the Pakistan Bureau of Statistics, the poverty rate in the country increased from 24.3% in 2015 to 24.9% in 2018. The COVID-19 pandemic further exacerbated this issue, with the poverty rate estimated to have increased to 39% in 2020.

There are several reasons why an increase in foreign reserves may not necessarily lead to a reduction in poverty. First, the benefits of an increase in reserves may not trickle down to the poorest sections of society. Second, structural issues in the economy, such as a lack of job opportunities and low wages, may prevent the reduction of poverty even with an increase in reserves. Finally, external factors, such as the COVID-19 pandemic, can have a significant impact on poverty rates.

While an increase in foreign reserves can be an important measure in addressing a balance of payments crisis, it may not necessarily lead to a reduction in poverty. It is important for the government to implement policies that focus on reducing poverty and addressing structural issues in the economy.

The writer is a senior research assistant at the Institute of Development and Economic Alternative (IDEAS)

 

Published in The Express Tribune, February 20^th, 2023.

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