Dr Hafiz Pasha and Anjum Ibrahim's articles carried by Business Recorder on 12th October 2015 have questioned that reserves are highly unsustainable and would lead to higher indebtedness. A few comments are offered here to counter their contention.
In 2013, when the present government assumed responsibilities, the total reserves stood at US $11.02 billion, net reserves with banks were US $5.01 billion and US $6.01 billion were with SBP. Because of forthcoming payments and uncertainty about the future, they further depleted to $7.75 billion, with US $5 billion left with the banks and US $2.75 billion with SBP. It is due to consistent and credible reforms implemented by the present government that the reserves reached a record level of exceeding US $20 billion on 30th September, 2015.
What is more, the SBP reserves rose to US $15.247 billion showing a higher growth than the marginal increase and commercial banks' reserves stand at US $4.826 billion. It is worth mentioning that the present government has also made repayments of approximately US $9 billion.
Furthermore, the perception that all of it has been accumulated by way of contracting expensive external debt is patently flawed. The all inclusive cost of the external debt contracted by present government comes to around 3.28%, which is significantly lower than the domestic financing cost of about 10% even in an era of low domestic interest rates. Thus cost of the external debt contracted by current government is not only economical but is also dominated by long term funding to free up the cash flows for development needs in the near term.
In order to establish the fact that this government has not increased the debt burden of the country, we cite a leading indicator of debt burden, namely short-term foreign debts as a ratio of reserves (Short term FX Debt/ FX Reserve). This has declined or improved from 68% to 32% within the last two years of present government thus fostering confidence among international lenders about soundness of country's external account. The stability in exchange rate has been achieved by warding off speculative attacks on rupee when the exchange rate abruptly shot to Rs 111 to a USD in the early days of present government. In this regard the role and contribution of FX reserves can hardly be over emphasised. One must also not forget that many multilateral agencies tie up their funding to a base level of reserves and it is because of this factor that now the country has qualified to access IBRD resources thereby enabling further flow of economical resources for key infrastructure projects.
The GDP growth rate of 4.24% was not only a seven years' high but is a harbinger for coming years when the real growth rate is expected to range 5.5%-7.0%. The writers must bear in mind that the economic cycle has taken an upward turn and needs time to gain momentum, which we expect to happen this year and beyond. Early indicators show that FDI during the first three months has gone up by 7.7% and exports have shown resilience even at the time of declining commodity prices in international markets that may have been a blessing in one form due to low POL prices but has been a bane on the other hand by depressing export values of our key exports, namely cotton textiles and rice. The subject of exchange rate relates to central bank. However, it should be noted that at present the central bank has adopted a flexible exchange rate that allows market forces of demand and supply to play their role. In an environment when country's reserves are rising, the stability of exchange rate should be easily understood.
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