Foreign exchange reserves buildup and what it means
Dr. Vaqar Ahmed
Pakistan’s forex reserves are now comfortably placed at around $20 billion and are being projected to remain on the upward trajectory during the medium term. This has contributed to good business sentiment and stability in the currency value.
The debt relief provided by the Group of 20 nations for indebted economies including Pakistan’s, gave a much needed breather. Perhaps the developing economies will need further extension in this facility as the timeline for COVID-19 is prolonged.
The remittances have also been a bright spot until now. One hopes that these inflows remain resilient amid future waves of the pandemic or any changes to the policies of gulf countries towards Pakistani workers. The overall reduction in the trade gap, although painful for some manufacturing industries whose imported inputs become expensive, has also contributed to a comfortable forex position.
Amid the pandemic, the government has also taken regulatory measures to attract proceeds other than remittances from Pakistanis living or working abroad. The Roshan Digital Account is one such example. Millions of non-resident Pakistanis can now invest in both conventional and Islamic Naya Pakistan Certificates using both foreign and local currency savings.
Some analysts are of the view that the amnesty for the construction and real estate sector ending in December may also have contributed to the interest by the Pakistani diaspora.
Having said this, it is unfortunate that the country’s borrowing needs for fiscal operations remains so high. The government is keen to raise more financing for its operations through commercial means and external debt equity. During the past 24 months, Pakistan’s external debt and liabilities are now standing at $114 billion. Another issuance of Eurobonds/sukuk is around the corner as per the recent information provided by the Ministry of Finance.
The strategy of borrowing on relatively economical terms today to manage or retire yesterday’s maturing debt is understandable - but it’s been the country’s strategy for far too long.
Most times when the country has resorted to external debt equity, it results in raising funding (e.g. through sukuk) at more than the market interest rate. This clearly indicates high levels of country risk and low confidence in the structural reform efforts, even when the pandemic wasn’t around.
As Pakistan is currently finding it difficult to bring the fund program back on track and the negotiations with the International Monetary Fund around the power sector and tax reforms do not seem to have an end, it could give the wrong signal to the bond market, leading to a much higher rate for Eurobonds.
Furthermore, traditional development partners have been concerned regarding the sustainability of the federal subsidy outlay. While the first wave of COVID-19 led to a justifiable increase in social protection spending, the same fiscal space may not be available with the government going forward.
It will be difficult for development partners to continue their long term support unless promises with regard to the circular debt, autonomy of regulators, and public sector enterprise losses are not fulfilled. Besides, these are measures which should happen even if the pandemic wasn’t around.
As debt levels pile up, the role of the parliament will become even more important. The oversight function of the relevant parliamentary committees will be important so that a more robust debt management strategy, based on future threats to the economy, is in place.
This is important as many a times, the finance division is guilty of procuring debt only because they were getting it on cheaper terms without forecasting the actual need. Examples such as the non-utilization of deferred oil facility, swap arrangements and even loans from commercial banks have been around in the past and ultimately future generations end up carrying a large burden of debt servicing.
While the build up of forex reserves is a welcome sign, Pakistan is still not in a position to render dividends of this comfort to its private sector.
For example, private enterprises still find it hard to make payments abroad or to borrow in foreign currency. Foreign investors often tell us how taking their profits out of the country involves various tedious steps. A divestment and repatriation of proceeds could take a long time.
These regulatory challenges continue to remain due to the lack of confidence our regulators have on the sustainability of forex exchange reserves-- and this will continue to be a key constraint on business growth.