May 30, 2003	Friday	Rabi-ul-Awwal 27,1424

KARACHI, May 29: The State Bank has no regrets for not having been able to put part of its foreign exchange reserves in euro when it had been trading below parity.

“Our primary objective has been to protect our hard-earned foreign exchange reserves,” said Tawfiq A. Husain here on Thursday at the State Bank head office. He was asked to explain had the SBP placed some foreign exchange in euro in the past when it was trading below parity with the US dollar but was sure to rise gradually.

Mr Husain made no direct reply to the question — and instead went on to say that keeping very hard-earned foreign exchange in any particular currency has to be seen from the perspective of a central bank. “Everybody looks at the up side but we have to keep our eyes on down side as well,” he said implying that a central bank needs to weigh various risks associated with the investment in any particular currency regardless of volatility in its exchange rate.

“As a responsible central bank...the most important concern (for us) is the security of the capital,” he said, adding that by nature a central bank is conservative — implying again that making money out of exchange rate fluctuations alone should not influence a central bank decision on diversifying its forex reserves. He said (in 1999-2001) some central banks in the Asia Pacific region had initially put part of their foreign exchange reserves into euro accounts thinking that the single European currency might rise. But the euro fell instead — and they had to take a hit on profitability.

“It is a very harsh lesson to learn,” he said reminding the questioner again the SBP was the custodian of the public money and cannot take investment decisions as freely as individuals and corporates can take. “If we loose (on an investment made in a particular currency) people will hold us responsible — and not any economist.” He was told that some economists believe that by not investing foreign exchange reserves into euros the State Bank has lost an opportunity of making money. Since its physical launch in January 2001, the single European currency has appreciated by 27pc against the US dollar. Since January 2001 till date, the euro has traded as low as 85 cents and as high as $1.19.

“We should not depend on one currency, especially when we see a great deal of variation in value (of different currencies),” economist S. Akbar Zaidi told Dawn. “We have to diversify (the basket of reserve currencies) and try to be one step ahead of the market (in making projections about currency movements). “This does not mean that...the central banks enter speculative markets...but the SBP should be smart enough to understand how the international foreign exchange trends are working.”

The State Bank continues to keep a very large share of its foreign exchange reserves in the US dollar and dollar-denominated securities. But SBP deputy governor Tawfiq Husain said the central bank had started a process that would lead to diversification of its reserve currencies. He admitted while talking to reporters that a very large chunk of Pakistan’s $10-billion-plus forex reserves was kept in dollars and dollar-denominated securities but could not give the figure.

“We have set up a risk management cell in the State Bank,” he said, adding the cell would assess various risks before recommending diversification of reserve currencies. He said this cell in collaboration of similar cells at the commercial banks would draw up a risk management plan.