How to save foreign exchange reserves?

A comprehensive policy is needed, instead of approaching IMF.

Zubair Choudhry April 14, 2013
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

KARACHI: Foreign exchange reserves of the country seem to be standing on a critical point again. According to statistics released by the State Bank of Pakistan, the reserves fell to $12 billion after the payment of $44 million to the International Monetary Fund (IMF) last week.

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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Snoop Dog | 8 years ago | Reply

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???

Reserving the reserves | 8 years ago | Reply

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.

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