Pakistan is to invest $3.2 billion out of its foreign exchange reserves of $11.5 billion on the advice of international investment experts to profit by the record reserves.

We do not know for sure now in what foreign currencies are the reserves held in banks abroad; but the bulk of the amount is in US dollars. They were mostly bought from the local markets following the fall in the exchange rate of the dollar by about 8 per cent and far more around the world. Much of that was bought in the financial year ending June 30 last, as the State Bank of Pakistan (SBP) has said in its Annual Report for 2002-03.

Keeping much of the reserves in US dollars is not something unusual. China, too, has kept much of its tremendous reserves of $383.8 billion from the mainland alone in the US currency or in US treasury bonds. It is the Chinese way of compensating the US for the very large trade deficit of $115 billion it has with the US now. Japan does the same with far more. But Pakistan has neither such a large trade deficit with China and the US nor are its reserves very large.

Pakistan may not gain much by investing almost a third of its reserves abroad in view of the very low interest rates prevailing around the world, particularly in the US, if the reserves are invested in US treasury bonds. The duration of the holding also matters. The returns could be higher if the reserves are held in corporate bonds and even more if they are used for buying stocks and shares; but that can be risky in the uncertain US economic conditions.

The government has already lost to an extent by buying the dollars, as since then the rupee value of the dollar has come down and even more of the Euro value of the reserve. But then, all countries with the dollar reserves have lost, and not the new entrant, Pakistan, alone.

Pakistan is entering the world money market with less than one-third of its reserves. Whether it will be committing more of its funds would depend on how well it fares with the initial investing and the world economic conditions.

There has been a great deal of talk of the US really wanting a soft dollar so as to export more and reduce its global trade deficit of $537.8 billion, and particularly the deficit of $115 billion it has with China against the imports of $140 billion and exports of only $25 billion. To overcome the large trade deficit and achieve a reasonable balance the US wanted China and Japan to devalue their currencies or have a flexible rate of exchange for the Chinese Yuan. Both declined. The US is hence looking for other solutions, some of which are drastic and contrary to its free trade philosophy.

If the US devalues its dollar, as it did in 1972 by 10 per cent, the value of our investment in the US and our dollar-based holdings will go down. Along with that will also go down the rupee value of our foreign debt in dollars. But the US secretary of the treasury John Snow and the US President George Bush have asserted they are in favour of a strong dollar, but they want other nations to help bring down the large US trade deficit and the current account deficit. And that takes tough doing.

The greatly regarded Warrn Buffett, chairman of Berkshire Hathaway, which is noted for its consistent high dividend, has suggested that to overcome the large US trade deficit Washington should come up with bonus certificates for US exporters which will enable the certificate-holders import just as much from other countries. The import certificates will be tradable, and he expects them to enjoy a premium of 10 per cent which will make imports that much more costly and reduce them. Through that means he expects the US trade to be balanced and be freed from the running sore of increasing trade deficits.

George Soros, the famous billionaire philanthropist has also attacked the economic and foreign policy of President George Bush and his spending spree in Iraq using tax payers’ money while many of them are unemployed. He has announced a donation of ten million dollars to the Democratic Party and denounced George Bush stance that “countries not with the US are against the US”. He says: “ we are becoming enmeshed in a vicious circle of escalating violence.”

Talking of the financial crisis the US faces, Warren Buffett says that until the middle of the 1970 the US had a trade surplus. In addition there was the income coming from US investments abroad which was $32 billion in 1950 and $68 billion in 1970. But in the late 1970s the trade balance changed and the balance of trade deficit of one per cent of the GDP was recorded in the late 1970s and yet the American ownership of assets abroad was so large.

By 1980 the income from the foreign assets of the US was as high as $360 billion.

Since then the balances of trade and payments have been going downhill and the annual trade deficit now exceeds 4 per cent of US GDP. And the rest of the world owns US assets worth $2,500 billion in excess of what the US owns as its assets abroad. And these large assets held by foreigners are in claim checks, US bonds(government and private) and assets like properties and equity securities. In addition, five per cent of the shares of companies worth $50 trillion are owned by foreigners and their profits or dividends transferred abroad annually.

Moreover, says Buffett, foreign ownership of US assets will grow at about $500 billion per ear at the present US trade deficit level. And that means the deficit will add about one per centage point annually to the net ownership of the US assets by foreigners.

The US budget deficit is a large 4.6 per cent of its GDP,the highest in a Western country.

All this springs from the fact that the richest country in the world is living beyond its means by 4 per cent of its GDP now.

In such a context President Bush has come up with an additional budget allocation of $87 billion for the occupation and reconstruction of Iraq and Afghanistan. But $65.6 billion out of that will go to meet the military cost, which means much of that money will go back home with only $20.3 billion will go to meet the cost of reconstruction mostly by US companies and their associates. No wonder the US Senate and the House of Representatives approved the bills, but after wanting to have some oversight on the expenditure.

If the US will spend too much on the armed fores and too little on relief and real rehabilitation peace will be slow in returning to Iraq and to other troubled areas. If the US will spend too much on itself and too little on others who need real help, the world will continue to be greatly troubled, with pockets of explosion in too many places.

And the money we have saved to buy dollars and invest in the US may go to meet the excess expenditure of the richest country in the world with its war-happy ways.