Federal Finance Minister Ishaq Dar has not stopped crowing about the rise in foreign exchange reserves to 18.72 billion dollars as of 11th September 2015 from around 11 billion dollars in 2012-13, the last year in the tenure of the PPP-led coalition government. However, apart from the Prime Minister who is hailing this as a major success of his government no one else - economists and the informed members of the public alike - appears to be enamoured of this feat. So which side is technically right: Nawaz Sharif/Dar's assessment or those of their opponents, both within and outside the PML-N?
Foreign exchange reserves have risen by around 7.5 to 8 billion dollars during the two and a quarter years that Ishaq Dar has held the Finance portfolio - a not too insignificant rise. So why so few takers for Dar's apparent success? The why is fairly straight forward and requires citing two related statistics, released not by the many who challenge the veracity of the data released by the Pakistan Bureau of Statistics (PBS), a department under the administrative control of the Finance Minister, but by the State Bank of Pakistan (SBP) whose data remains unchallenged: (i) external debt rose by 6.6 billion dollars in two years - to 65.147 billion dollars in the second quarter of 2015 from the 58.5 billion dollars during the last year in the tenure of the PPP-led coalition government; and (ii) Ishaq Dar, contrary to international practice routinely adds the roughly 5 billion dollars held by private individuals in commercial banks within the country to the country's total foreign exchange reserves. During Dar and the IMF mission leader's joint press conference at the conclusion of the seventh review, the latter stipulated that foreign exchange accounts held in banks by private individuals are not defined as official reserves by the Fund. This explains why the IMF placed Pakistan's total foreign exchange reserves at around 13.5 billion dollars by end-June - covering more than three months of imports - in the eighth IMF staff review under the 6.64 billion dollar Extended Fund Facility uploaded on its website this month. The Fund report adds that the reserves were "63 percent of the Assessing Reserve Adequacy (ARA) metric (defined as a metric that encompasses a broad set of risks, including a drop in external demand or terms of trade shock, capital flow drains due to external liabilities stocks - short-, medium- and long-term equity of debt liabilities and/or capital flight risk) and are expected to reach 14 billion dollars by end-September supported by the continued oil fall, SBP intervention and multilateral and bilateral disbursements."
Unfortunately, however, the support extended by continued fall in international oil price has not led to a decline in our import bill irrespective of the fact that oil imports account for roughly more than 30 percent of our total imports which were estimated in 2013 at 40 billion dollars while in 2014, the first year of the Dar-led Finance Ministry, imports rose to around 42 billion dollars and in 2015 there was a marginal decline to 41.3 billion dollars which was still 1.3 billion dollars more than what was achieved in 2013. Exports on the other hand should have received a major boost after the effectivity of the GSP plus status to Pakistan by the European Union in January 2014, a boost that had been estimated at one billion dollars per annum, however, data reveals that the rise was far less than envisaged: in 2013, exports of goods were around 24.7 billion dollars, in 2014 exports rose marginally to 25 billion dollars and by 2015 had declined to 24 billion dollars. Flawed fiscal as well as monetary policies, heavier than ever reliance on domestic borrowing that effectively crowded out private sector borrowing as well as long delays in refunds are some of the reasons cited for the decline in exports - factors which fall within the purview of the responsibilities of the Finance Ministry.
SBP's intervention through a significant stepping up of spot purchases of foreign exchange netted around 3.9 billion dollars in 2014-15, helped by cheaper energy imports and drawing on SBP's currency swap line with China by 500 million dollars - factors that the IMF staff review claims increased the reserve position to three months of imports.
Thus a rise in multilateral and bilateral disbursements - or a rise in indebtedness - is clearly the most significant factor in raising the foreign exchange reserves.
The eighth IMF review also notes that "while the recent turbulence in international financial markets could somewhat affect near-term capital inflows, staff and the authorities agreed that further accumulation of reserves is desirable as the balance of payments position remains vulnerable and reserves are still significantly below adequacy norms. Staff noted that further accumulation could also help arrest the recent trend in REER appreciation, which is inconsistent with fundamentals, although staff agreed with the authorities that a range of other issues, including electricity shortages, security issues and the business environment also need to be addressed to strengthen competitiveness."
Thus a 6.6 billion dollars rise in external debt and the 5 billion dollars considered as private sector reserves gives a total of 11 billion dollars. It is little wonder that economists accuse Dar of strengthening the reserve position through borrowing from abroad and data manipulation.
Remittances, the only source of foreign exchange earnings that propped up the economy during the Zardari years as well as the incumbent government's tenure have witnessed a steady rise: 13.7 percent in 2013-14, and 16.1 percent during July-April 2014-15. The eighth IMF review, however, warns that "the benefits of lower oil price and strong remittances could be partly offset by a weak export performance." Foreign Direct Investment (FDI), a source of foreign exchange inflows that are actively pursued by all countries - developing and developed alike - declined last year thereby compromising the government's claims that the world views the Pakistan economy very favourably post-2013 elections. The government has been successful in sale of Eurobonds and Sukuk but at a rate double that prevalent in the global market (and more than 3 percent on bonds offered by debt ridden Greece).
To conclude, the rise in foreign exchange reserves claimed by Dar is routinely 5 billion dollars less than claimed (as around that amount is held by private sector) and the rest is largely due to external borrowing. The key macroeconomic indicators associated with strengthening reserve position remain a source of serious concern, particularly a decline in exports and a rise in imports while FDI remains elusive; remittances are the only continuing windfall the government is relying on and that can be supported.
Comments
Comments are closed.