Why Forex Reserves?

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?

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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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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

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?

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.

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

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.

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?

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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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