Why Forex Reserves?

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I read this article earlier in a Pakistani newspaper. It is a very good read.

I am extremely impressed with the team that the current govt. has put in place. It is bright, articulate, credible, with international track records of success and most of all completely corruption-free. Dr. Ishrat belongs to this group. It is much-awaited change from seeing the Abida Hussein`s becoming S&T ministers and the Asif Zardaris becoming Minsiters of Investment.

Pakistan`s economy, according to nearly all international organizations which matter (accept the International Bank of Arjun_m Inc., as well as some of the PPP and PMLwallahs), has turned the corner. The credit for this goes to people like Shaukut Aziz and Dr. Ishrat. And to Musharraf for appointing these people and then not bothering them. Now it is just a question of how quickly the economy can grow. Pakistan averaged 6% economic growth for four decades. So we should be able to get back to that level of growth.

I think somehow or the other, positions like the Governor of State Bank, should be delinked from politics, if they already aren`t de-linked (like judges), and should be completely independent, perhaps through the Constitution, for fixed amounts of time.

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Excellent article although I doubt that author will be able to interact and respond to various questions raised by chowk interactors. I have learned quite a bit about forex and its effects on the economy. I do have few, perhaps silly questions.
1) Why did not current regime during the first two years or previous regimes thought of buying dollars from the open market at 2-3 rupees higher than the inter-bank rate? Was it a secret that nobody knew about it before the author? I am positive that corruption did not stop previous governments from following this route. Actually it provides another avenue for corruption, i.e., buying in the open market from favorite dealer.
2. Where did the money in Pakistani currency came from to buy forex, given Pakistan every year and still has budget deficit?
3. Are there any downsides to this magic trick of building forex and all the benefits outlined in this article?
4. I am highly doubtful of the extremely terrifying scenario presented for the case of not having such forex. Many times during BB and Ns governments forex fell to below one billion without the panic mentioned in this article.
5. Why do not China and India accumulate even more forex given China`s trade surplus and Indian high economic growth rate compared to Pakistan?
6. Do Pakistan get interest from anywhere by depositing 5 billion dollars? If not, over time the price paid for forex actually exceeds the suggested 2-3 above inter-bank rate because the rupees used to buy forex would have earned interest if placed in Banks.
Once again, thanks to Dr. Ishrat Hussain for presenting his take on fores reserve issue.
Chowk Staff: Shouldn`t this be a University Avenue article?