The decline in reserves will push the rupee further lower against the dollar, which will lead to an increase in the import bill. ILLUSTRATION: JAMAL KHURSHID
At this stage, the total foreign exchange reserves can just cover the import bill of two months, assuming no sharp rise in international oil prices. Moreover, Pakistan has to pay around $500 million to the IMF until the end of May, which obviously would bring the reserves further down.
On the other side, the decline in reserves will push the rupee further lower against the dollar, which will lead to an increase in the import bill. So, it can be argued that unstable foreign exchange reserves would spark many other challenges on the external as well as internal economic fronts.
At this stage, the country seems to be stuck in a vicious circular flow of borrowing and repaying foreign exchange to the IMF in order to stabilise the forex account. Though Pakistan had opted for the IMF bailout programme in 2008 to stabilise the foreign exchange account, it is being forced again to approach the IMF due to instability in the same account after repayment of the loan.
This is like the economy entering a tunnel having no exit – just because of the economic managers who did not realise the dire consequences of delaying a comprehensive foreign exchange savings policy in the past.
On the one side, foreign exchange inflows excluding remittances remain uncertain and unreliable and on the other side a number of loopholes do exist from where foreign exchange is wasted.
Oil consumption has rapidly grown in the past two decades, which has immensely increased the import bill. Transportation including road and air and power generation through oil are the two areas where oil consumption can be controlled in the long run.
The use of railway for goods transportation can bring down oil demand, which would definitely lead to savings in foreign exchange reserves. In the same way, switching to cheaper modes of electricity production like hydroelectric, wind and solar power can also ease the pressure off the foreign reserves.
Another way to save foreign exchange is through reduction in imports and increase in exports. Most importantly, imports of luxuries should be restricted in order to stabilise the forex account. Though the increase in remittances is a key factor providing cushion to the foreign reserves, they are not enough at a time of domestic economic slowdown.
There is a need to formulate a comprehensive policy to strengthen the foreign exchange reserves position, instead of repeatedly knocking the doors of IMF.
The writer hosts business talk shows on FM 101 and Radio Pakistan and is pursuing M Phil degree in Economics
Published in The Express Tribune, April 15th, 2013.
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Mmm... Did not ET advocate a rosy future at the end of tunnel a few days ago?? What happened to Tirmizi and others prognosticating a false dawn???
Hey RJ M. Phil....wind and solar power are not cheaper modes of electricity..they are quite capital-intensive projects. The project cost utlimately reflects in higher power tariff..greater than in the case of thermal plants.
"Another way to save foreign exchange is through reduction in imports and increase in exports."
Great analysis genius. That M Phil degree really seems to be paying off.
calm down, gold has already thorough to new lows, which will be followed by crude - and then we will have a better import cover. and for your further knowledge, there is no sense of mentioning increase in oil consumption during 'last two decades', especially when the consumption has flattened down in the latest stats. and for your further disappointment, remittances are also continuously growing. just wait and see, and no need to succumb to IMF, please!
@Asif: Defaulting on INF loan may give you temporary relief. It is similar to killing the goose that laid the golden egg. Pakistan's credit is such that any commercial international credit is impossible to get. So what are you going to do when your forex runs out if you cannot even get INF to bail you out.
Secondly, it is fine to say that we want to get paid for Pakistani exports in rupees. But you will have to turn around right back and buy dollars with those rupees to pay for the Pakistani imports because it is unlikely that KSA, UAE or anyone elsewhere is going to sell you their products on rupee payment. They will need dollars. So your method does not increase demand for rupees but adds unnecessary transaction cost to the whole exchange.
Na... na.. Working within the same paradigm will not suffice anymore. Not saying they arent the right way. I am saying that cutting subsidies, devaluing rupee, increasing exports wont be enough. State Bank needs to think outside the box. Global asset class correlations completely changed since 2008. The Global Monetary system with an appreciating dollar as a reserve currency is causing major heartburn for every central bank out there.
What needs to be done is State Bank of Pakistan needs to default on its Foreign Obligation to IMF. Here's the moral justification for it. IMF is an institution to provide liquidity. It went beyond its mandate to lend out to countries. $11billion loan is not a liquidity issue, but a solvency issue. Also there's the case for "Odious Debt".
There is no need for the Global Monetary system with floating currencies for a reserve currency. State Bank of Pakistan needs to demand Pak Rupees to settle its export bill. Sure, Pakistan is a net importer. And this new policy would directly reflect in Rupee depreciation, but whats wrong with that? If a country imports more than exports, then its currency should depreciate till its Balance of Trade gets more balanced. But the good thing is, Pakistan would be done with IMF, the World Bank and the dollar inflation from entering its economy.
I have explained this Policy in the article "We make it the Mighty Dollar" which you can Google up. Or you can access the original article by clicking on my name.
Or perhaps by listening to IMF and stopping the energy subsidies we love to dole out to promote inefficiencies.