Why Forex Reserves?

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.

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

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.

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.

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.

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.

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 ?

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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.

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.

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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

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.

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

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