Unlike cash rich countries that are worried due to the US dollar's weakness and are demanding replacement of USD with an alternate currency, Pakistan does not face a similar situation. A little over 50 percent of Pakistan's foreign exchange reserves holding is IMF money and 25 percent or USD 4.2 billion of its holding consists of F.E. 25, and placed with the SBP are depositors money (individuals and corporations).
How does Pakistan's Central Bank manage funds? IMF does all its lending in Special Drawing Rights (SDR), which is international reserve asset. Its value is based on a basket of four major currencies - euro, Japanese yen, pound sterling and US dollar and the basket of currencies determines the value of SDR on daily basis at noon in London. If London is closed, the New York market is there for the purpose and if both markets are closed European Central Bank reference rates are used. SDR is basically an artificial currency used by the IMF for internal accounting purposes and is backed by over 140 member countries.
Although, SBP is not a signatory to the IMF's Sensitive Data Dissemination Standard (SDDS), the details of Pakistan's forex reserves are available on SBP's website under the heading "Int'l Reserves and Foreign Currency Liquidity" as per the IMF standardised global format. Moreover, the SBP is strictly complying with the IMF's required standards for the last five years, which confirms that the dealings of the central bank are quite transparent. The total official reserves asset is USD 13.575 billion, which is announced on a monthly basis. Out of which, liquid asset is currently USD 9.986 billion and is announced on a weekly basis. It does not include SDR equivalent of USD 1.435 billion and Gold of equivalent of USD2.153 billion.
As of October 31, 2009, USD 1.782 billion is placed in Securities, which means the money is invested in fixed income G-8 approved currencies, which are sovereign securities.
A good part of the chunk equivalent of USD 3.791 billion is placed in deposits in the form of G-8 currencies with central banks, Bank for International Settlements (BIS) and IMF. The SBP has invested another good part of money equivalent of USD 4.122 billion in Fixed Income G-8 currencies with banks headquarter outside reporting country, eg placed with UK-based in Singapore or Dubai.
Appropriate management of funds by the SBP has now acquired a far greater importance because of increasing intensity of financial crisis, which is likely to prolong for a longer duration, which may lead to the collapse of more financial institutions. Another risk involved is the forex exposure as a grave risk lies with a G-8 currency, which gets exposed when converted from SDR or USD, because at the time of maturity price does not remain same and it moves either way.
In view of Fed's zero percent interest rate policy and lower global interest rates by the developed economies and quantitative easing by major global economies, the average return of 2.9 percent in FY 08-09 by SBP is quite plausible. Why is Pakistan's Central Bank not purchasing gold when there is demand for gold from global central banks? SBP has gold reserves of 65 tons, which was last revealed at $1040 on October 31. Gold at current market price of USD 1130 would fetch another USD 200 million in its kitty. This is about 15 percent of the total forex reserves.
Globally, average gold reserves held by central banks are roughly 10.2 percent, so Pakistan's gold reserves are still on the high side. Interestingly, about 40 years ago, SBP had gold reserves of roughly 20 tons. Most of the gold in SBP's book is a confiscated stuff. The good part is that SBP made a wise decision by not selling its gold reserves, which, 5 years (Gold) had a book value of USD 775 million, and at current revaluation rate its gold reserves would jump to USD 2.399 billion.