Sliding reserves

Published: October 19, 2011
The writer is editor of business and economic policy for Express News and 24/7

The writer is editor of business and economic policy for Express News and 24/7

In case you missed it, the sign said Caution: steep slope ahead. Next to the sign there was a small picture of a sharp downward slope. It was placed there to warn travelers on this road that they should brace themselves for a steep descent that could test the traction on their tires.

The steep slope ahead is the decline in our foreign exchange reserves that have, in the first quarter of the fiscal year, dropped by more than what our financial managers had bargained for. With our old friend, the current account deficit, back in our lives again and that fair weather mistress — foreign inflows — having reliably and predictably abandoned us one more time, the drop in our reserves should become a serious worry.

For the entire family of macroeconomic indicators that the textbook introduces you to — fiscal deficit, GDP growth rate, trade deficit and inflation — none gets our government leaders moving the way a drop in foreign exchange reserves does. Historically, we have seen reserves as the primary metric with which to measure our economic health, and even today, much of the complacency towards our economic difficulties comes from the fact that our reserves are ample — even if only for the moment.

But a very complicated picture is in the works as the moment passes.

Our reserves are on a downward trajectory that will accelerate as the big ticket debt repayments kick in, beginning in February. A matching uptick in inflows is unlikely to materialise given the economic travails stalking the world economy and our stormy relationship with our benefactor — the US. The only scenario that could potentially slow this drawdown somewhat is a collapse in oil prices, but even this is unlikely to reverse the process.

Complicating the picture is the approach of the elections.

Historically, declining reserves have spelled eras of tough decisions for the incumbent government. All three coups in our history have occurred when foreign exchange reserves hit historic lows. Not surprising since reserves are an important indicator of an army’s capacity to sustain a fight, how else to arrange for the replenishment of fuel and ammunition stocks that get consumed at a rapid rate under hostilities? After all, you can’t fly an F16 on CNG. No wonder our political leadership has always attached such importance and significance to maintaining reserves as their primary economic responsibility — it is perhaps the most ‘strategic’ economic variable that exists in an environment like that of Pakistan, where fiscal and natural resources are there for the asking of the khaki overlords of civilian politics. And governments that have failed in their responsibility to maintain

If reserves continue to decline, the government is likely to find itself caught between the populist demands of the elections and the displeasure of the armed forces. Backstopping the reserves will require one thing above all else: repairing the relationship with the IMF. And two obstacles await the government when it comes around to this inevitability.

First and most important, is the state of the relationship with the US, and loss of goodwill universally. And second is the unfinished business from the last standby facility that expired end September. It’s unlikely that the world community, led by the United States, will stand by and watch Pakistan go under, regardless of the state of our relationship with our superpower patron. But it’s also unlikely that they will be very forthcoming, preferring instead to watch from the sidelines and wait till the very last minute before stepping in, to ensure that the recalcitrant and ungrateful beneficiaries of their ‘generosity’ have learned a valuable lesson.

In any event, the downward sloping outlook on our foreign exchange reserves could mean big trouble ahead, especially if it picks up pace.

Historically, whenever reserves have started declining, they have activated large processes that governments struggle to control. First come concerns regarding debt obligations, then concerns about the currency, which triggers a panicked flight into dollars, which drains bank liquidity. If the government proves unable to contain this downward trend, like it did in 1999, the military steps in. And whenever the trend has been contained, like in 1997 or in 2008, it has been done with help from the IMF.

Published in The Express Tribune, October 20th, 2011.

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Reader Comments (13)

  • Babloo
    Oct 19, 2011 - 10:58PM

    Let Karma unfold. Only then will real solutions may emerge.


  • Meekal Ahmed
    Oct 19, 2011 - 11:10PM

    Excellent Khurram, as usual.

    You raise an important points but I must say I never connected it to the khaki variable. Silly me.

    In the old days, reserves were reported in top secret memo’s to only a handful of people — perhaps about three or four. So what the situation was either in Ayub or Zia’s time is still not really known (unless it is reported in the Econmic Survey). Mush, yes. I think by that time the secret was well reported and now of course the media produces a headline the moment it falls by $50 million (out of $18 billion — now $17 billion). In that respect, I think the media, by hyping the issue in bold print with every small wiggle and disturbance, does a dis-service.

    Sure, watch out for what you think might presage a trend decline and try and explain it. But spreading panic though a head-line, even if unintentional, can snowball.

    At the end of the day, mis-managing and abusing the economy will produce preditable results. That is almost pre-ordained. There may be long and variable lags but that is where the impact will ultimately fall — in a loss of reserves. The buck really stops there — if I may coin a phrase.


  • Pundit
    Oct 19, 2011 - 11:14PM

    Nuclear Pakistan is an Economic Somalia.

    Pakistan Railways, Airlines , Energy Crisis………

    And “inauguration” of Daimer Bhasha dam….:)

    Pipe Dreams.


  • Pundit
    Oct 19, 2011 - 11:31PM

    Fate of Projects in Pakistan.

    “About the Lowari tunnel, where Mr Muqam said contractors had stopped work for non-payment of funds after an expenditure of Rs8 billion, the prime minister said he had already met the communications minister twice about the matter and that the required Rs2 billion would soon be released for the project, which is designed to ensure an all-weather road link to remote Chitrat district, which is often cut off from the country by snowfall in winter.”

    Rs 2 Billion referred above have been already diverted to the wages of Pakistani Railways.


  • John B
    Oct 19, 2011 - 11:59PM

    The author correctly pointed out that every coup in PAK was associated with sliding reserves.
    Musharraf stated that as one of the reasons for his adventure.

    Devaluation of PAK rupee is in the horizon. Lowering interest rate amidst inflation is essentially devaluation, and with change in SBP administration one can see where it is going.

    Devaluation is not a bad thing at this juncture. As this will make PAK exports very competitive for foreign exchange earnings, can alleviate the domestic services payment delays.


  • Babloo
    Oct 20, 2011 - 12:49AM

    If the establishment was not financed by USA, WB, IMF for last 60 years, they would have behaved much more responsibly, for survival.


  • fahim
    Oct 20, 2011 - 1:25AM

    $17 billion reserves in this country is complete false number chanted again and again by planted elements in media, govt and our “experts”. $10 billion of this is loan from IMF, WB, ADB and other countries. Of the remaining, 25% will go in debt servicing. And the remittance figures are highly debatable. All over the world, immigrants are facing massive job loss and payment defaults are common. On top, ours is a failed broken economy with no hope of improvement in short to mid term. Inflation is 16% and pakistan rupee is devalued like crazy to 90. In this highly unstable economic and social scene, only a mad person brings in money. Then from where are these dollars coming in??? There should be serious investigations, as finance ministry has issued several fraud numbers in past… even to international donors !!


  • Santosh
    Oct 20, 2011 - 5:14AM

    This time if the military conducts another coup, the conditions stipulated in the Kerry-Lugar Bill will be violated and the US will be forced to withhold all aid. So a coup would only make matters worse for Pak, as the generals well know – after all this is why they so chafed at the conditions in the bill 2 years ago.

    Pak’s only option is the IMF and it will need the US support to get the IMF to release funds. This is why as the TFT reported, when Hina Khar told the Americans that “the US needs Pakistan more than Pakistan needs the US”, they promptly responded “No, madam, we don’t.”


  • hasnain iqbal
    Oct 20, 2011 - 11:00AM

    Excellent article. Khurram your insights into political economy are brilliant. It is such a pleasure to read your articles. Keep it up man.


  • Khalid Ahmed
    Oct 20, 2011 - 1:34PM

    A refreshing perspective into the relation between Forex reserves and military coups in the Pakistani history.

    Pakistan will have to approach IMF again sometime soon and the upcoming elections will pose a massive dilemma for the government.


  • Meekal Ahmed
    Oct 20, 2011 - 2:34PM


    IMF money is meant to be kept in reserves. There is nothing wrong with that. We should worry when we start to dip into that.

    On remittances, no one knows for sure. There are various theories including “hot money inflows” as investors seek returns they cannot get in the west. It also possibly includes money laundering.

    Under section 111 (4) of the income tax act any money brought in through normal banking channels is free of tax and no questions are to be asked.

    An “investigation” would kill the golden goose.


  • Kashif
    Nov 19, 2011 - 10:33PM

    Low forex reserves are a pretty good indication of balance of payments problems and in turn overall macroeconomic woes. So its natural that when Army intervened on the pretext of failure of politicians to manage the economy (i.e. macro aspects of it), forex reserves were low.
    It would have been nice if the author provided any data on forex reserves in 1958 or in 1977 to support his argument.


  • BigDude
    Nov 23, 2011 - 1:39PM

    Dollar is stable in Pakistan as compared to India where it is experiencing upward growth against their Rupee. Govt of Pakistan is not naive and knows the consequences of what would happen if we cross the fine line between liquidity and default.


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