The ‘record’ reserves

In the midst of the terrible death toll due to the heatwave in Karachi, a piece of ‘breaking news’ flashed in front of my eyes. It said that the finance minister had ‘felicitated’ the prime minister for achieving a ‘record’ level of foreign exchange (forex) reserves. I guess it’s worthwhile to look into this claim and decide whether any felicitation was warranted.
I will not go into the economics of maintaining reserves. Rather, the discussion will be centred on the components of the reserves. The important thing to notice is that no bifurcation by sources in this record forex is publicly available. For practical purposes, the most critical aspect of forex is how fast a government can tap them. The reserves lying with the State Bank of Pakistan can be tapped immediately, but not those lying with the commercial banks (around $5 billion). As Dr Yaqub, former governor of the SBP had stated in these pages a few years back, including the reserves of commercial banks in total forex count is nothing but window dressing, and the SBP (as well as government) have no claim over these reserves.
Let’s move to the other components. They can be bifurcated into remittances, Pakistan Investment Bond (PIB) money, IMF and World Bank loans, exports and other investments. Of course, ‘gifts’ like the $1.5 billion help too. Let’s take the case of remittances first. Their increase over the years solely owes to the fact that the rising cost of living over time has necessitated a higher inflow of remittances from expatriates over time. The majority of it (if not all) goes to consumption. If the growth in remittances were due to the government’s successful policies, a substantial part of it should have been reflected in investment rather than consumption. So even if remittances are a big part of the present level of forex reserves, they don’t owe that to government policies.
As far as exports are concerned, we don’t have anything left from export

earnings since we import more. It’s as simple as that. Similarly, overall investment in Pakistan has been witnessing a declining trend for the past many years. By all accounts, these two are a negligible part of the forex mix. One would discount these components from the equation. But for the sake of argument (and to give the government the benefit of the doubt), let’s keep these two in the count too despite the fact that they would not represent a substantial part of the present forex levels.
All this leaves us with other important components of this claimed record: the IMF and WB loans and the Pakistan Investment Bond money. To claim forex from these sources is a tad ingenious and dishonest. Why? To understand, consider the example of a man who (for argument’s sake) earns Rs100,000. He takes out a loan of Rs500,000 – to be returned after a short period of time with interest (which makes the return payment more than Rs500,000). Despite the fact that the major part of his wealth is now in the form of debt, he considers this an achievement.
The above example easily fits the IMF and WB loans (which come to approximately $5.5 billion in the present mix) and the inflow of money from auctions of PIB. In essence, these are not earnings; these are loans which we will have to return with high, periodic interest payments (besides returning the principal amount). Both of these are components of this claimed ‘record’ level of forex reserves, and are a substantial part of it. If the government is really interested in presenting the forex level as a record never achieved before, then it should come out with numbers that are net of loan money and interest paid on them. That will give the people a clearer indication of what’s in the SBP’s kitty of forex. Loans can help in the short term (as in the case of reserves), but they can be difficult to pay-off in the long run.
There is another important aspect of this debate which concerns getting loans at a certain rate of interest and the credibility of a state. Despite the misplaced euphoria of our economic managers, the fact remains that our credibility and risk profile remains lower than even those countries whose economies are performing worse than Pakistan’s. And what better example to give in this regard than Greece, a country that is on the verge of default on its repayment obligations. Despite its adverse economic predicament, the Greek government managed to raise debt in 2014 by selling its 5 year bonds in international market at 4.95 percent. Contrast this to a 5 year PIB, which sold at a staggering rate of 11.50 percent in 2014 (its latest auction came at an interest rate of 9.25 percent).
Clearly, despite the tall claims of turning economic performance around, our credibility in the eyes of loan providers is lower than that of Greece. To further clarify the link between credibility and low interest loans, take America’s example. In the wake of the recession, they also raised debt by selling government bonds. What was the interest rate offered on them? Hardly a percent! But loaners were more than happy to invest in US bonds because of America’s credibility as the safest borrower (America has never defaulted on loan repayment obligations).
Some people may protest claims of Pakistan’s low credibility by pointing out that the danger of Greek default (which would have set off catastrophic consequences in the EU area) compelled IMF and others to back Greek rescue efforts, which helped Greece sell their bonds at a comparatively lower rate despite having a very poor economic performance. But let’s not forget that the prospects of a nuclear armed Pakistan’s economy going into a tailspin are even more frightening.
Thus, if one has to use this argument, then the only conclusion to come out is that our negotiators are not good at playing their cards. Of course, there are also the conspiracy theory types who swear that such high interest rates are the result of our officials being in cahoots with the loan providers/investors. I don’t really subscribe to this view, but when I read telling accounts like the one in former ambassador Abida Hussain’s book of how Pak officials (in league with a supplier of equipment) manipulated rates to get their share of the commission, I sometimes have my doubts.
What comes out of all this is that we are again being taken for a ride. The whole PR exercise becomes suspicious since no breakup of the forex reserves is given. There seems to be little point in official jubilations while sitting on a pile of debt (plus all the regular interest payments) that we have to return at some point in time. Just consider the following figures, stated by no less than the finance minister himself.
In FY2013-14, Pakistan paid a cumulative amount of $76.54 million as interest on IMF and WB loans. Mind you, this does not include the interest payments on PIBs that we’ve lately accumulated. Once we consider those, the payment in lieu of interests will come out higher than the above stated.
There is a clear pattern running throughout Pakistan’s economic history which is being repeated again. It goes something like this: every government has contracted foreign debt to shore up the reserves and (as they have been telling us consistently) to pay for earlier debts. By the end of their tenure, Pakistan is left with more debt to pay. Nobody should be surprised if the same is the outcome at the end of this government’s tenure.
In the end, leave aside economics for a moment and ask yourself this simple question: when more than a thousand people died within two days in a city that is considered Pakistan’s economic lifeline, were congratulations based on flimsy grounds really necessary?
The writer is a freelance contributor.
Email: shahid.mohmand@gmail.com
Twitter: ShahidMohmand79