KARACHI, Sept 10: How on earth the dramatic increase in foreign exchange reserves is going to help us? “When my son is going to get a job—and when am I going to retire and relax?” asks our 70 plus masi who does household chores for “bajis”—from literally dawn to dusk. Her only son Faiz 20 who is a construction labourer often remains out of job—as business activity is slowing down— thanks to a slump in the economy.

The simple question the masi asks is too difficult to answer— even for our foreign educated economic wizards who make up the team of economic managers. For they seemingly spend more time in painting a rosy picture of the economy—rather than weeding out poverty from our social landscape.

“There is no evidence...that foreign exchange reserves buildup has contributed to economic growth,” says a noted economist and dean College of Business Management Dr. Javed Ansari. “There is no significant increase in foreign direct and portfolio inflows.”

Pakistan had total liquid foreign exchange reserves worth only $3.2 billion before fateful September 11, 2001. Now these reserves are more than $7.5 billion. The government counts this dramatic increase in reserves as a result of its prudent politico-economic policies pursued after 9/11. But the question is: Has the buildup in reserves given some spur to economic activity? “Not at all,” says leading economist Dr. Akbar Zaidi.

“Forex reserves do not have much to do with economic activity and have, at best, a symbolic value of not much significance.”

But what actually the country needs?

“What the country needs is democracy, the withdrawal of the military from all walks of life—and sound economic policies under responsible and accountable public representatives,” says Akbar Zaidi.

So how much reserves we should have?

“Foreign exchange reserves should be linked to imports only. Reserves should be stabilized at an equivalence of two months import value. They should not be allowed to rise above this level,” says Ansari.

Should the State Bank use part of the otherwise not-so- profitable forex reserves for extending foreign currency loans to provincial governments for development?

“Not at all,” says Dr Akbar Zaidi. “The few reserves that the SBP have will be lost in a very short time.” (Out of the total $7.5 billion reserves $3.5 belongs to the SBP and the rest to the banking system.)

But Dr. Javed Ansari thinks differently. “The SBP should give interest-free foreign currency loans to the provincial and local governments. This can contribute significantly to expansion of infrastructure and technology intensive projects and can be means for reduction of provincial governments’ reliance on imperialist finance.”

Apart from the debate on whether or not the reserves could be used for extending FCY loans to provinces a basic question is: How the reserves can be used for economic growth...For creation of job opportunities?

“They cannot (be used),” says Dr. Akbar Zaidi. “All they do is give the exchange rate a buffer.

“By propping up foreign exchange reserves, they are only pleasing their masters—the IMF. There is no real, substantive, positive, effect of increases of forex reserves, on the economy.”

This is where Dr. Akbar Zaidi and Dr. Javed Ansari tend to agree.

The fact that the three-year $1.6 billion IMF-backed poverty reduction and growth facility does require the State Bank to maintain a certain level of liquid foreign exchange reserves is but an open secret. The SBP has recently decided to use $750 million or 10 percent of the total reserves in fixed income risk- free dollar-denominated bonds. The possibility of such investment seems far too fetched. But even if the SBP is able to do make this happen 90 percent of the reserves would continue to be in low-yielding bank accounts abroad or at best invested in still lower yielding US treasury bills.

The points discussed above regarding the usefulness of the forex reserves buildup show that this is not going to prop up the domestic economy—a fact that State Bank Governor Dr. Ishrat Husain also reckons. But he makes it clear that expecting economic growth through draw down on reserves is not advisable.

Writes Dr. Husain in a series of articles published in Dawn last month. “The...strategy to draw down reserves and allow the government to prime prompt the domestic economy will prove short- sighted, expose Pakistan once again to enhanced risk of default on its external debt and liabilities in the future and generate uncertainties and turbulence in the markets.”

“The more viable way to accelerate growth is by inducing private sector to invest.”

Dr. Husain says: “The tools of economic policy are geared to achieve the set objective.” But he makes it clear that “the same tool i.e. reserve accumulation cannot be used as a defence against external vulnerability—and as a stimulus to domestic economy at the same time.”

That the increased reserves have provided a strong defence against external vulnerability is all but evident.

Besides, the big foreign exchange reserves has kept the rupee stable creating room for the SBP to relax its monetary policy to facilitate local businesses and investors. It is a different question, however, if this relaxation of monetary policy has paid well or not.