December 15, 2003	Monday	Shawwal 20, 1424

The government has announced the placing of idle reserves of the country to earn some profits/ dividend in the global financial market. The current foreign reserves stand at $11.75 billion out of which around $3.2 billion will be placed in the global financial market through the approved fund managers.

The timing of the placing of these funds may not be right, because the global financial markets, being depressed, are offering little or no value to international investors.

The global economy is in recession right now like in the 1930’s. The interest rates have hit rock bottom and most of the investors are moving out of the US markets and placing most of these funds in the Asian markets, which have a better offer for investors and with some real secure returns. The ministry of finance has taken lot of time in deciding the fate of these strategic funds.

Over the past two and half years, we could have earned some return on these reserves. However, bureaucratic hurdles, instability of the region, poor positioning strategy of the country and too conservative approach of the country’s financial gurus have led us nowhere. Pakistan now fully depends on tranches and different aid amounts to arrive and relies on the IMF, the ADB and the US to build its reserves.

Pakistan missed opportunities for diversifying the reserves portfolio on many occasions.The options available were:

1. Placement of reserves in euro currency; 2. In gold and; 3 In the Asian markets rather than in European or the US markets.

In January 1999, the 12-nations of the European Union started Euro currency to boost the economies and to provide an alternative to the US dollar after the Asian financial crisis in 1997-98 that created havoc for the global economy, leaving thousands jobless and their families ruined. The initial low value of euro against the dollar was understandable.

Many countries benefited from the initial low exchange rate that was 0.79 euro to 1 dollar. Countries like China, Japan and other Asean countries started diversifying their dollar reserves into the euro. That was a very strategic move on their part taking into account the geo-political and economic situation of the world. This meant a huge blow to the dollar and its supremacy in the financial markets. Many of the countries had converted 40 per cent of their reserves in euro.

The euro is currently trading at 1.05 to 1 dollar and is more powerful than the US dollar. Keeping into account our reserve position and instability of the region,The Government of Pakistan or the SBP could have converted 10 per cent of our reserves in euro in 2000. It has since much appreciated against all the major currencies of the world. We too could have benefited from this appreciation.

Today 95 per cent of Pakistan’s foreign reserves are in dollars, five per cent are in SDR and gold. This composition is not in uniformity of other major central banks where diversification of reserves is mandatory. This places Pakistan on a very high-risk profile.If the dollar depreciates, we are on the losing end of the string. We are confronting this syndrome right now.

GOLD: In 1999, the Bank of England decided to sell some of its gold reserves it had accumulated since WW II. This was indeed a very conspicuous decision as gold prices were down to $235 an ounce internationally. However, the instability in the region with terrorist attacks on the rise, they withheld their decision to wait for the right time. Time changes fast and gold was again back in high demand,growing by 53 per cent and giving boost to prices. It was trading at $ 350 an ounce and rose to $ 390 an ounce. International investor took refugee in this commodity to play safe and get secure returns in the uncertain financial markets.

Financial managers of Pakistan could have utilized this option to build foreign exchange by changing the composition of reserves. However, gold has never got an importance in our reserves build-up. Globally speaking, all central banks around the world have kept a portion of their reserves in gold except for Pakistan, which is quite unique and strange. The percentage of gold in reserves of some countries is: India 20pc Bangladesh 15pc China 30pc Singapore 24pc Thailand 14pc UK 40pc Russia 37pc Sri Lanka 16pc UAE 20pc Germany 27pc Nigeria 39pc Pakistan 5pc.

ASIAN MARKETS: Pakistan’s financial managers did not learn the lesson. Investing in the Asian markets could have been a good option rather than going into the European or US markets. Germany, the biggest economy in Europe is facing the worst slump in its history after WW II. It has become the sick child of Europe. US Treasury, bond markets are abysmally low. Most of the Japanese investors who have huge stakes in real estates in USA are pulling their investments out of it. Arab investors have withdrawn colossal deposits out of the USA and placed in euro amounting to $500 billion.

Global investors are moving into countries like China, Malaysia, and Hong Kong. Pakistan could have earned the same if it had invested in these Asian markets with huge safe and secure profits. Pakistan could have invested $ 1.00 Billion to make good use of the timings to enhance its reserves position. However, we failed to do so to cash in on the golden opportunity. Asia [including China, Japan, India, South Korea, Indonesia, Singapore, Taiwan, Thailand, Philippines, Pakistan, Bangladesh, Malaysia, Hong Kong, and Vietnam] has a GDP of $ 18 trillion, which is larger than the United States’, which has got a GDP of $9.6 trillion.

In nutshell, our financial managers need to look at the opportunities at the right time so that the reserves are less vulnerable to external shocks and more stable not only in the short run but also in the long run.The State Bank needs to devise strategy where our exporters can bring more and more export earnings back to the country instead of holding them in the foreign countries. Stable and steady policies can enhance the reserves requirement of the country, providing financial stability, viability and strength to the beleaguered economy.