Why Forex Reserves?

sac: Thanks for your post. In the meantime, UBL has been sold to a group of bidders from UAE who actually defaulted previously on a loan of 300 million dollars from the same bank. Welcome to the reality Pakistan style. First take a big loan, defaul, and use the same money to buy the same bank. Long live Shaukat Aziz as Finance Minister. Lets see Habib Bank and PTCL are next for Saudis and Lebanese..............
Many more spicy and juicy stories in the latest issue of South Asia Tribune.

Yaar Godot,

I think you will also disagree with me and distance yourself by calling me a bigot, but I am thoroughly convinced that Hindus have some serious self-esteem problems. I, for example, once called them Shiva Ji worshipers, about two years ago, and they still show me their wounded souls. I have absolutely no problem with what they say or how they say it because (no one can beat me in badtameezee, I am absolute), but I do have a problem when they start thinking that they can get away with it.

Take for example this Hindu; about a year ago, last September, Romair wrote something about Pakistani T-shirts and since then this Hindu is suffering from Obssesive Compulsive Disorder. He just cannot manage to write a single post without mentioning Paksitani T-shirts. Recently, an astonished interactor asked him how did he manage to write a couple of posts without mentioning Pakistani flag; did someone shove a Pakistani flag up his wazzoo? And he replied that you are shoving Paksitani flag up my wazzoo cuz you dont have Kashmir. One year is enough time to show that one is not suffering from OCD but....

Take for example another Hindu Jay. His wife ran away with Shabban doodhwala about a couple of years ago, and since then he can`t help but blame it on two nations theory.

This OCD is a serious indication of a broken self-esteem and lack of self respect. And I am the bigot?

There is a proverb in our language that a man is known by his freinds, and guess who come to the rescue of these OCDs....who else but ex-commie paki liberals. And I am the one who is a biggot.

arjun_m

True, you don`t descend to religious name calling but you have used (and consistently do use) words such as condomistan and pakiland.

Here is a simple thing you might want to keep in mind: there are a lot decent of folks out there who call themselves Pakistanis. A whole young generation has grown up there that does not derive its identity from eternally fighting with or badmouthing India, but from the mere fact of being born in Pakistan. These people have a right that their national identity be respected.

That doesn`t mean that you should avoid all slug-fests. If you think certain policies have been disastrous, feel free to criticise them. Just that, degrading any country in its entirety constantly isn`t the wisest course of action.

arjun_m (#16)

Arjun, first, I must give you credit for not responding in kind to me (it shows that you may actually like me.)

It`s not the Muslims you are attacking that prompted me to write what I wrote. You are attacking, in an exceedingly loathsome way, an entire nation and people who identify with that nation. You are attacking an identity. Now, if the shoe was on the other foot, I don`t think you would feel very comfortable, either.

You have every right to display your anger and criticize what you think should be criticized. But there is a civilized way to make yourself heard and a way that`s breads hatred. Unfortunately, you seem to have chosen the way of the philistines. It`s not going to earn you any respect (it`s another story if you don`t want to be respected.)

If you attack in a despicable manner, be prepared to be attacked as viciously. It`s your call.

re SameerFB,faruk:

Forex reserves by themsleves are but one indicator of a country`s economic health. Levels of foreign investment,GDP,Import/Export ratios etc. are all needed to get some idea about an economy. Even in the well-documented economies of the west, economists have a hard time figuring out whether their economies are on the right track or not because there is no single indicator for that. That`s what makes a market. People reading the same number sometimes draw opposing inferences.

Similarly forex reserves has been used by the military dictatorship in Pakistan to trumpet their economic management. They`ve failed to mention the plummeting levels of foreign investment,strong imbalance in imports/exports and a contracting internal economy that send opposite signals. Increased forex reserves are meaningful if they do not represent one time events such as increased levels of remittances after 9/11 or lavish reshedulings by creditors. They also fail to take into account the global weakening of the dollar against most currencies in the past few months.

The US has a well-pronounced interest in keeping Pakistan stable economically. Its like the stock market of the mid nineties. Stanford trained economists or Citibankers will do as well as monkeys in picking stocks that return astronomical returns. It would be a different matter when the internal hollowness of the Pakistani economy will rear its ugly head. It wouldn`t matter if the forex reserves are $5 billion or $15 billion. The mighty British pound was humiliated by some currency traders in 1992 when the chancellor of the Exchequer tried to use close to 10 billion pounds to defend it. Same thing with the Asian economies in 1997. The sad part is that the carpetbeggars would be long gone and safely ensconced in Connecticut(or Boston) when the indebted common man in Pakistan realizes they`ve been taken for a ride once again.

later
-sac

faruk and hobbs: Thanks for your posts. I still do not understand why Dr. Ishrat did not mention the source of Pakistani currency to buy forex. Is it a state secret? I doubt it was done by printing more currency. The option of taking loans internally with ~10 percent interest (as pointed out by faruk) and using it to biy forex with low or no interest.
There is another serious development reported couple of weeks earlier. The privatization comission of Pakistan disclosed to General Account Office that some 70 billion rupees from the sale of public sector industries to private sector were transferred to Central Board of revenue / Ministry of Finanace. However, ministry of Finance refused to acknowledge such transfer. Nobody knows where this money is. Rumor has it that it was used to afloat sinking military welfare system like, Fauji Foundation. But it is possible that this money was used to buy forex. There was another unrelated story about the cost of privatization, ~11 billion rupees. This amount is too much for a small organization and they refuse to give detailed accounting of this money. Corruption is alive and well in Pakistan, thank you.
If 7 billion dollar forex is to convince foreign investors as guarantee money in case of pulling out: 1) They are not buying it: 2) It means to keep the higher level of forex or not using it to repay debt or debt servicing. What a silly logic just to lure foreign investment which depends on many other factors lot more than just fear of written off. Nobody would take interest in investing even in USA, if fear of losing dominate. No bank would lend money for the same fear. The risk is always measured against gains and not breaking even.
The 7 billion dollars forex, if includes private savings in dollar as suggested by many, is much less than the level of 11 billion dollars private money at the time of nuclear test and the freeze of foreign currency accounts. A large sum of that 11 billion dollars was forced into converting to rupees by small and medium account holders. The governments in Pakistan has always been using the private foreign currency holding. It is widely believed that at the time of freeze it was necessitated due to practically emptying of 11 billion dollars by the governments (on paying for arms and servicing the debt) rather than the fear of public withdrawal after nuclear tests.
Now Musharraf wants to buy 70 F-16s. Obviously forex will be used to buy them if USA agreed to sell.
The rescheduling is bad if the interest rate remains fixed at the earlier level. In private loans, as home mortgage, refinancing changes the interest rate. I wonder if the interest rate remains the same in rescheduling as it happens during rescheduling the private loans.

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Urstruly,
I wonder why you get lambasted left and right (Pakistanis and Indians) for saying bad things about Hindus. Yet...and yet...no one...mind you...no one...says anything when that arjun_mfkr and haramiu...spew words that come from their back-hole. I actually like it and take it as a compliment that you get lambasted. It shows that Pakistanis are held at a much higher level of decency and civilization than the Indians.

Romair,
You just degrade yourself by even mentioning arjun_mfkr`s name in your post, let alone address him.

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Romair

You expect decency from a Hindu? Sir, such animal does not exist. When I say that, I am called a bigot, and I wonder why people like you ask these questions then in the first place?

I fail to see the purpose of this article. Forex or not to forex, if that is the question then this article lacks the academic merit to prove a point. Comparisons with India and China are meaningless. A fair comparison can be made with Argentina. Please keep in mind that long before Argentina, Paksitan did what Argentina has done now; GOP committed the cardinal sin of freezing the assets (foreign currency accounts) of people of Paksitan- where people lost their savings and investment- the only investment which was considered safe from the vultures and scam artists of Cooperative banks. And GOP unleashes likes of these vultures on the people of Paksitan who are not even fully dead approximately every ten years.

If the point of this article was to prove that we have forex - then it is a naive attepmt by a person of the stature of Dr. Sahib. Yes, we know we have forex now, and we also know that it is the blood money that we earned from the murder of Afghanistan. If Dr. Sahib is trying to prove that we earned this money becuause this regime has somehow controlled their haram khori, and it is due to our internal growth because of the economic policies of this regime then I ain`t buying.

SameerJB, hobbes # 9
Building a foreign exchange reserve is an expensive necessity. Lets review what happened in the 1997 Asian crisis. Foreign investors withdrew large amounts of money from Thailand. As the Thailand reserves fell more investors withdrew their investments perpetuating a crisis. The Thai govt. tried to borrow from the IMF but could not get a deal and their currency went into a free fall. Western investors decided that if one Asian tiger can crumble all can and withdrew billions of dollars from the Asian countries creating the 1997 crisis. This crisis had no economic basis just sentiment. There were no economic underpinnings for this crisis. Two economies that survived this crisis were India and China, one because most of the investment in these countries was by their own nationals and two because of large foreign exchange reserves that allayed any investor fears. If Pakistan wants to attract foreign investment it has to convince foreign investors that they can withdraw their money at any time and hence the need for the reserve.
Now why did earlier govt. not buy foreign exchange from the open market for such an obvious need? What your current govt. has done is transfer international debt to local debt. along with some creative accounting. Let?s ignore the creative accounting for now and focus on the changing of international debt to local debt. The international debt was at 2 to 5 % in dollars, the local debt is in Pakistani rupees at 11 to 14%. This is generally a very inflationary action. You are borrowing at a higher rate of interest. This will increase the deficit and drop the value of your currency.



Regards,

Faruk

SameerJB
On your question as to why China and India do not accumulate foreign reserves in the way Pakistan has - If my understanding is correct, in the case of Pakistan, it represents an ability to repay. Though it may function similarly in China and india, the economies of both China and India are experiencing sustained growth, whereas the Pakistani economy, if trends remain, can look forward to a sustainable growth rate in the near future;,that is to say, while negative growth has been arrested, the economy of Pakistan is still fragile.
I recall reading this article in ``DAWN`` and see in your question (why didn`t they do this earlier) the awareness that many times, especially in Pakistan, economic management, has not been the primary criteria for decision making and seem influenced by short term political imperatives.

arjun_m: I have always wondered why you get so upset when someone says anything good about Pakistan. I can understand a Hindu Indian getting upset if someone says something bad about India. But why would a Hindu Indian get upset when no one is saying anything bad about India, and are only saying something good about Pakistan?

It is truly strange behavior. Has this behavior been taught to you? Is it taught in general in India? Or are you an exception? Or have you developed it on your own? Is it due to jealousy? Or a sign of an inferiority complex? Or are you just the type of person, who is so bitter towards himself, that he cannot see anyone else saying anything good about themselves, either?

If Pakistanis agree that you are a superior person, and India is the wealthiest nation in the world and has been an economic giant since 47, will that make you stop your behavior? If it will, then let me be the first to state, that India has always been the wealthiest nation in Asia, and had you been the finace minister of India, God knows how much more it would have progressed. Does this ease your hatred? Or will you continue?

RE: The Article
I would like to compliment the author on a well-written article and the foreign exchange reserve of Pakistan. I do have a few questions for the financial manager’s of Pakistan. There is no gainsaying that the reserve is important but how you achieve it is also important.
Pakistan includes the deposits by expatriate Pakistanis as part of its reserve. This money is not available to the Pakistan govt. to repay its debt. This is the kind of accounting jugglery that got Enron in trouble.
Second, others have alluded to this too. The growth in repatriations from expatriate Pakistani’s can be attributed to the adverse investment climate for them abroad post Sept 11 th.
Third what the author has claimed as a big achievement for the current Pakistan govt. the rescheduling of debt. This is a big achievement under the circumstances, it gives the Pakistan govt. a lot of breathing space. 15 years before the first payment is due. But it should be remembered that interest will accrue for those 15 years and if the Pakistani rupee sinks further it will become a very expensive debt. The previous military govt. of Zia ul Haq went down this road too. They piled up a lot of deferred debt making them look good.


Regards,

Faruk