AS per the Investopedia, foreign exchange reserves are assets denominated in a foreign currency that are held by a nation’s central bank. These may include foreign currencies, bonds, treasury bills and other government securities. Most foreign exchange reserves are held in US dollars, as most of the trade in the world takes place in this currency. These forex reserves serve many purposes, but are most significantly held to ensure that a central government agency has backup funds if their national currency rapidly devalues. As per the ‘balance’ the countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate. Those with a floating exchange rate system use reserves to keep the value of their currency lower than the dollar. Another critical function is to maintain liquidity in case of an economic crisis, to stabilize currency’s value and to pay for the imports and also to sustain defence related imports in a war.
Also, in the time of crises, the foreign investors withdraw their deposits from the country’s banks, creating a severe shortage of foreign currency. This pushes down the value of the local currency since fewer people want it. That makes imports more expensive, creating inflation. The central bank corrects the situation and prevents inflation by supplying the foreign currency. Also, forex reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movement.
Due to the above mentioned benefits, although any country would like to have maximum forex reserves, but it would first endeavour to have and maintain minimum required forex reserves, enough to pay for three to six months of imports to prevent food shortages and to cover its import bill and debt payments, for 12 months. Hence, all countries want to increase their exports and amass maximum reserves. The countries with the largest trade surpluses are the ones with the greatest foreign reserves. They can stockpile dollars because they export more than they import. At present, as per the World Bank and the IMF based Investopedia data, the ten leading countries in maintaining maximum forex reserves ranging from 3 trillion to 404 billion US dollars (USD), are; China with above 3 trillion dollars, Japan, Switzerland, USA, Russia, India, Taiwan, South Korea, Hong Kong and Saudi Arabia with 404 billion USD.
The Gulf countries, Iraq, Iran, Turkey, Indonesia, Malaysia and Brunei each have above 100 billion USD as forex reserves. Out of the South Asian countries, India has 567 billion USD reserves, Bangladesh 33 billion USD, Nepal 10 billion USD, Pakistan 9 billion in 2022 and 3.5 billion on 7 July 2023, Sri Lanka, 3.4 billion USD and Afghanistan 9 billion USD (frozen).
Pakistan’s ongoing weak economic position is because of the foreign loan repayment instalments (plus interest) of about 11 billion dollars every year due to be paid from 2019onwards. This amount was on the total foreign loan of 95 billion USD borrowed from 1972 to 2018, by the governments in these years, 20 billion USD by the military led democratic governments and 75 billion USD by the civilian led democratic governments.
And, those governments, somehow could not increase the exports to the required level to create enough forex reserves to pay the annual import bills and to also pay back the annual foreign loan instalments, as Pakistan’s imports have always been more than its exports and its forex reserves also remained meagre. For example, as per Macro trends, in 2018, while Pakistan’s imports were 68 billion USD, its exports were just 31 billion USD. And, in 2018, Pakistan’s forex reserves in the State Bank in April 2018 had been just 12 billion US dollars.
Therefore, from 2019 onwards, Pakistan had to borrow/manage dollars from the IMF, the World/Asian Banks and friendly countries just to pay back the aforementioned foreign loans’ yearly instalments. And, in the year 2022/23, to get the IMF loan to avoid default and to meet the IMF conditions, the PDM government increased the prices/taxes, which raised the inflation from previous 9 percent to 34 percent, that has hit the common people very hard.
Hence, to get out of this cyclical process of getting loans to pay back loans and the situation of impending default, Pakistani governments need to focus on increasing/maintaining a minimum level of forex reserves of 30 billion dollars in the next three years, by increasing exports on an emergency basis, apart from reducing the imports. And, on a long-term basis, Pakistan should aim to raise its forex reserves to 100 billion US dollars within next ten years.
Thus the suggested strategy to increase the forex reserves is as follows. To meet the target of increasing exports and decreasing the imports, as a long-term measure, the successive Pakistani governments should finance/facilitate the farmers/industrialists/enterprises in increasing agriculture and industrial production based on the modern Chinese technology. In the short-term perspective, the governments should focus on increasing/facilitating the export of already trained manpower/services in information technology (IT), surplus engineers and doctors and skilled workers, including nursing staff abroad, to quickly earn the foreign exchange.
In the above context, Pakistan’s successive governments should also finance/facilitate further expansion/broadening of the IT training and training of workers in technical and nursing jobs/skills in the courses of 6 to 12 months duration in government/private institutes/enterprises to send them abroad. There are more than fifty categories of IT jobs/skills required abroad and many types of technical qualifications/skills to be imparted to our workers. For the above mentioned purpose, the government should create a task force of technical experts out of IT, engineering and medical services, who should coordinate and oversee/ensure the output of our training institutes as per the foreign standards. By working in a mission-oriented way, Pakistan can manage to start sending a large number of well-trained manpower abroad just after about one year.
—The writer is also a former Research Fellow of IPRI and Senior Research Fellow of SVI Islamabad.
Email: hanifsardar@hotmail.com
