Why Forex Reserves?

godot,
#30

{{I don`t consider you a bigot; angry perhaps, but not a bigot. I know very clearly, just as you do, who the real bigots are at Chowk (and both of us know who the hypocrites are as well.)}}

Oooh that was beautiful!.....tears well up in my eyes... & please let me play my violin to that tune!

Urstruly is no bigot! Ofcourse not! In fact I credit that musalman for making me a better hindu AND a better brahmin! Before I had the honor of meeting urstruly, I was just your garden variety wayward brahmin coyote, castrated by the sins of my ancestors.

He reminded me that we hindus worship a penis god (among 33zillion odd gods).... , listen, you muslims have an advantage over us idolators. You guys have to remember only one God; OTOH, its pretty difficult for us banias to remember all of ours, OK!...not counting all the insects, rats, snakes,sticks & stones we worship.

Ever since his holiness reminded me of the penis god; I have become that god`s bakht. It been a miracle! My days of castration are over...it grew back! & functions like a bionic organ. My wife has a permanent smily expression.

Imagine that! a one-God fearing musalman, (an ultimate untouchable to a bigot brahmin butthead like me), changing my life for the better! Jeeze, I tell you, ever since that day I just love muslims ...I take that back... I love every single monotheist. My bigotry vanished!

No no sir, hazrat urstruly is a great man....i mean he is this close to the Prophet (pbuh). He has great respect for all religions. Yeah, he maybe pissed at times, but never once has he said a bad word about any single religion...I dont recall a single post of his where his anger has turned into hatred.

I mean he is so fair & impartial that he leaves Chowk in a huff, several times, promising never to return....he just cant STAND the viscious hatred of the venemous, parasitic, ex-commie Paki-bashing Pakistani hypocrites. During those brief abscences, he goes to the middle east & kicks some serious Arab butt. He is the only muslim I know who berates the damn Arabs for their very inhuman, unislamic & ungrateful blind eye to the plight of Kashmiri & Gujerati muslims. After his anger settles down, he comes back to Chowk to regale us with his charm & wit.

Dunno why, even though I`m a die hard fan of his, this Islam ka mashoor pehelwan, doesnt talk to me...sniff.

Hobbes # 33

The reason for building up a foreign exchange reserve according to Dr. Hussain is to attract investment. Debt management is no doubt a good first step, but it has to be coupled to structural changes in your economy to spur growth. Economic growth, investment and exports should drive up your foreign exchange reserve. There is hardly a precedent for the opposite. But its no small task to bring an economy back from the brink.

Regards,

Faruk

Thank you Godot; your post had a soothing effect for my own OCD :)

I read this in the newspaper today, I hope you will like it:

apne apne baywafa`oN ne humaiN yakja kia
warna maiN tera nah tha aur tou kabhi mera nah tha.

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Sameer
I am not an insider, but i do work for a multinational bank in Pakistan. I do not believe in criticizing for the sake of criticizing. Not that I blame anyone on this forum on doing so. I do realize that there is lack of adequate information being put out by the State Bank of Pakistan which leads to erroneous conclusions.

There is no system of deposit insurance in Pakistan be it local currency or hard currency unlike those that prevail in the west like FDIC etc. Obviously the onus of managing depositors` demand is up to each individual bank. The depositor on the other hand has to evaluate the probaility of getting his money back just like the bank evaluates the borrow for return of its money. The currency of the deposit is irrelevent in this respect.

The rule related to hard currency deposits have not remained constant over the last decade. Initially, Pakistan, in order to diversify its lender base (for hard currency) allowed non-residents to open up foreign currency accounts which the banks in Pakistan were required to hand it over and receive PKR in return. So as long as the bank gave back PKR to State Bank it would get the USD back. Now this continued for 5 years and in 1991, State Bank of Pakistan allowed the resident Pakistan also to hold hard currency in Pakistan. This new regulation was brought in to stem the hard currency flows off-shore. In 1985 Dr. Haq had permitted banks to issue Foreign Exchange Bearer Certificates in exchange for hard currency which may be reconverted in hard currency at any time. The overseas Pakistanis instead of encashing their USD at the official exchange rate would purchase FEBC and sell it to those individuals and companies that were interested in protecting their value of wealth eroding as the PKR depreciated.

Now as all hard currency was with SBP and the objective of SBP was to maintain a relatively stable PKR against USD (it used to set the rates at which it would buy and sell the currency in the market. Banks were not allowed to hold hard currency). Given that Pakistan has been running a trade deficit, the only way of managing this was, in absence of any other participant accepting currency risk, was to borrow funds from whatever sources that would make it available. Mind you the government had a very successful policy in this regard as it paid a rate significantly lower than what it would have had to pay if it had borrowed the money from commercial sources.

As for the present, subsequent to 1998, new deposit accounts were allowed to be opened under new regulations 1998. These regulations allowed the banks to manage the funds themselves and would not be able to get PKR if they wanted to place the funds with SBP. On the other hand, they were free to use the funds to lend to companies in Pakistan or to invest in Investment Grade papers (BBB and better) or with banks with similar grades. While these regulations themselves have taken quite a few turns, where we stand today is that, banks, other than what is required to be maintained in the form of Cash Reserve Requirement and Statutory Reserve Requirements totally 20%, can use the funds prudently as they determine.

I am sorry to write such a long note to clarify the position but it is better to have a complete understanding of the issue to come to an informed position.

The answer to your question is that while the banks in Pakistan being subject to the laws of Pakistan (and therefore may be forced to hand over hard currency), it would not be in its interest to do so. The only reason it froze the previous deposits is because it had already used the funds. Today the funds are not in its control. It would have to requisition the funds before freezing them. Mind you, banks try to match the tenor of the deposits with those of the assets and as such would not be able to comply with the demands of the State Bank immediately and would only be able to hand over the funds as and when they mature.

I hope this clarifies your question.

Another issue that has been raised is the question of economic growth. Previously the growth policy that was being pursued was that nationalized financial institutions had a volume disbursement target and the enterpreneurs would take these funds import some machinery and put up factories without due considerations to the future revenues. Obviously, the steps the government has taken is giving rise to withdrawal symptoms similar to the ones faced by a junkie (the enterpreneur). Short of running budget and trade deficits to prop up the growth rate, it is trying to work with policy stability to attract rational investors back into the ring.

The deregulations in the hard currency trading has led the PKR to adjust to market conditions. We have seen this since 2000 when the USD shortage took the PKR from 52 all the way up to 65. But subsequent to 9/11 as the countries that were attracting flows from Pakistan became more strict on money laundering laws, we have seen that the capital flows from Pakistan have ebbed. The PKR has moved from 65 down to 59 and is continuing to appreciate as the remittance from overseas Pakistanis have doubled since 9/11.

These funds are now looking for an appropriate investment opportunity and with the stock market bucking the international trend would get businesses to take some new business risks.

Please note that buying hard currency by printing PKR does not necessarily translate into inflationary pressure. This is one of the monetary tools that are available to the Central Bank. If such a situation was true Bank of Japan instead of buying just 25 billion USD per quarter would double the amount. Note that Japan has faced deflation despite such purchases.

Faruk
Thanks for acknowledging that stopping the downward trend was no small feat - would you agree that the rescheduled debts serve to act as an rudder for the direction the international community hope the Pakistani state will take? And does it not also serve to signal a confidence that if that direction is taken that the Pakistani economy can be productive so the degree that the repayment is not painful?

asaleh1, sameerJB,
No one is denying the importance of Foreign currency reserves. It is an important macro economic indicator. It is used by international investors and lending agencies to gauge the health of an economy.
I don’t believe it can be a goal in it self. It is one of the indicators that attracts investment and business. Pakistan has a lot of work to do in areas of GDP growth, business environment and general appeal as a business destination. Apart from that accounting private investment as foreign currency reserve is not right. Private investment are not available to the Pakistan govt. to repay their debts. The other methods of accumulating the foreign exchange used by your govt. are not exactly spectacular. They have rescheduled debts with no payments due for 15 yrs. They are not amortizing the cost of this debt n their debt liabilities today. This amounts to borrowing from your children. They have bought foreign exchange from the open market and paid for it by selling govt. assets and internal borrowing. This I explained earlier is inflationary. Its like borrowing from a credit card and putting the money in your checking account. If it gives you peace of mind fine, but its not a great investment strategy.
Having said that I must point out that turning Pakistan’s economy around in no small task and this can be a small step in that direction.

Regards,

Faruk

Please read ``nobody suggests its uselessness`` instead of ``nobody denies its uselessness`` in line 4 of post # 29

Urstruly #22

No, my friend, I am not going to distance myself from you. I don`t consider you a bigot; angry perhaps, but not a bigot. I know very clearly, just as you do, who the real bigots are at Chowk (and both of us know who the hypocrites are as well.) In fact, I think you are quite intelligent, and very funny at times. I may not agree with some of your thoughts, but good friends can disagree with each other without being hostile. That`s what a good friendship is all about. A true friendship transcends all.

At times you bring up good points, such as the problem of self-esteem. It is definitely a point to be pondered by an objective psychologist.

It`s very true, as you say, that a man is known by the friends one keeps. I`m a friend of yours. Let that determine how we are perceived by others. However, whatever the perception, it matters to neither of us. We both know who we are.

asaleh1, #24: Thanks a lot for your well informed, well articulated and well meaning post. You seem to me as an insider of SBP. Whatever the case, I really appreciate your insightful effort to respond to my queries. No matter what the importance of forex, nobody denies its uselessness. For that reason alone, I wish Pakistan and Pakistanis to always have as much dollars as possible. Money may not buy all the happiness, but it certainly is better to have it than not having it.

since you mentioned that banks are free to handle 2.5 billion dollars of private forex accounts. Are these accounts insured to return forex on demand? And more importantly, what happened to forex money in private accounts after freeze in the wake of nuclear tests. Weren`t banks then free to manage private foreign currency accounts? How can it be possible to have banks freedom to manage their own forex and right of the government to freeze those accounts? I see a clear paradox here. If I have to open a dollar account today, I will be more concerned about government right to freeze than freedom of banks to manage my account because that freedom I can have everywhere else in the world too.
Regards,
Sameer

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arjun_m,

re: #22

Nothing pisses me off more than when I agree with that frikking mullah. Whatever Hazrat Urstruly said about you is true.

Re SameerJB

Every Central Bank in the world prints currency to support the economy. The Federal Reserve has been able to bring down the interest rates by buying Treasuy Bills and Bonds from the market. It does this by printing money using it to purchase the economy.

The Bank of Japan has been injecting money like crazy to stablize the economy (See M1 growth for Japan stands at 31.50% year on year in August 2002). This means that The money supply jumped by 79 trillion Yen.

So basically in order to maintain an orderly growth in money supply, the central bank has two sources. The first is to lend the money to the government in exchange for Government Securities (Treasury Bills; Bond). It is the same thing if they buy the same securities from the market. The second source is to give the government PKR in exchange for hard currency that they may have borrowed or bought.

This is the case with building up the foreign currency reserves. The State Bank of Pakistan has to ensure that there is liquidity in the market and it ensures this by not buying government securities but hard currency there by meeting two objectives instead of one (hard currency reserves and keeping money market liquid so that corporates may get a lower interest rate for loans).

The government is running a budget deficit and as such privitization of company enables it to borrow less money by issuing government securities and use the proceeds of the privitization. The government has not been given to Fauji Foundation. Now if we are talking about Fauji Jordan Fertilizer company, it should be clear that the government promised them some price guarantees for its products (similar to those provided to the IPPs), however as IMF said that these guarantees were not competitive the government withdrew the price support and in lieu of that has to pay damages to the company which has gone bankcrupt (lack of consistent policies of previous government).

In the USD 7.5 billion, the private savings are in the vicinity of 2.5 billion. These funds are managed by the banks themselves and are not in the hands of the government.

The policy of the government is not to contract foreign debt at commercial rates but it would maximise the opportunities of debt being given to it on concessional rates. These loans are not being squandered away by selling them at cheap rates to the importers but are being retained by augmenting the Foreign Reserves.

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Re currency and where did it come from. How about the parallel economy? In India its called black money and rivals the legitimate economy in size though I doubt the Indian govt has easy access to the moeny floating around in it due to rules and regulations. That may not be the case with the Pakistani govt.

And how about the possibility that the deposing of the Taliban government might have required that a large quantity of narcotics to be hurriedly disposed of ?