Pakistan is proud of having built up an unprecedented foreign exchange reserves of $10.48 billion within two years, and the people, too, are happy. But how much money has it lost in terms of other strong currencies of the world and the rupee as the dollar has gone on depreciating steadily - a continuing attrition of the hitherto the strongest currency in the world?

As a currency expert put it: We have built up a tall tower but it is a leaning tower because of the new weakness of the dollar and America’s current internal and external policies.

The IMF chief, Horst Koehler, says the dollar has lost around 30 per cent of its value against euro within a year and on a trade-related basis that depreciation is around 16 per cent. He has stressed that a further rapid decline in the dollar would require concerted action from governments and central banks.

This development should not come as a surprise, he says, given the huge current account deficit of the US. The dollar has depreciated by 21 per cent within a year and by 14 per cent against a basket of significant currencies, says the “Economist” of London.

The foreign exchange reserves are kept in foreign banks abroad. And the governor of the State Bank of Pakistan, Dr. Ishrat Hussain, says not all the reserves are kept in dollars, but he had not come up with the composition of the reserves in terms of various currencies. Nor has he said how much of the dollar reserve was converted into euro or other currencies as the dollar kept on depreciating and there was a clamour in the country the State Bank should move more towards the euro for its reserve-building. Not to talk of 14, 16 or 21 per cent depreciation of the dollar a simple ten per cent depreciation could make the reserves lose a billion dollars.

Pakistan is not the only country keeping its reserves in dollars. Japan, China and many European countries keep a large part of their reserves in dollars until the depreciating US currency confronted them with the current dilemma.

The euro was 1.17 to a dollar when it was born as the common currency of 11 European countries four years ago. And after the euro had gone down sharply since then it is back to 1.17 dollars to the euro now. But the European economy is not without its weakness now. Germany is facing currently a deflationary crisis.

The problem with the US is that although it is the richest country in the world, it is also the most indebted in terms of volume of debt. It needs $500 billion annually from outside which comes as deposits in US banks and to buy US shares and bonds.

The US budgetary surplus has now turned into a deficit of $400 billion but the current debt to GDP ratio of the US is only 32 per cent. Ten years ago during the Reagan era the debt was 45 per cent of the GDP. And even if the budget deficit of $4000 billion continues for two more years of the Bush administration the total debt will be only 36 per cent of the US GDP. So President Bush is not upset by the excess of red ink on the budget.

Hence the world which has invested a great deal in the US, too, is not upset by the US budget deficit or the balance of payments deficit. But following the current external policies of the US many nations and persons are not ready to provide it with the $500 billion they have been furnishing annually as a matter of routine. The Arab and some Muslim governments may think twice before investing very large sums in the US.

But the US economy is expected to regain its strength gradually and the dollar become the strongest currency it was based on the economic strength of the US. But currently the US stock market is down and so are the interest rates. But interest rates may soon pick up and attract more foreign capital.

Meanwhile the American exporters are loving the weak dollar as it has helped them export more. The weak dollar has made it easy for them export their goods facing stiff competition from Chinese goods.

Meanwhile in the Pakistan currency market the euro having gone up and up ceaselessly, shed some of its fat on Wednesday and lost 65 paisa to an euro and came down to Rs 67.85, while the dollar was selling at Rs 57.60 - a Rs 10.20 difference.

And now the candidature of a new currency as an international factor is being pressed by none other than the Far Eastern Economic Review - an offshoot of the Wall Street Journal. Its cover-page article talks of the New Asian Dollar and the growing reach of China’s Renminbi which was not depreciated in 1997-98 when other East Asian currencies were depreciated in the East Asian melt-down. With the Chinese government protecting the Renminbi zealously and the Chinese economy growing fast and gaining in strength rapidly Renminbi may have a large role to play in the world, beginning with Asia.

It all depends on how prudent are the US external and economic policies and whether they take into account the interests of the world as a whole into account instead of only short term US interests.

Meanwhile, Dr Ishrat is well advised to throw some light on our reserves, and whether some timely conversion of the dollars to the euro had taken place and he has been able to cut the losses in the extraordinary situation the world faces because of the weakening of US currency and the risk of putting too much of the reserves into the dollar now?

Earlier it was said that instead of holding the dollars in banks we were making investment on bonds and other papers. If we had done that re-conversion may not be easy or cheap. Anyway he can tell us where we stand instead of letting the rumours fill the vexing void.

The US manufacturing sector is showing signs of improvement in parts and the dollar is rising slowly in relation to other currencies. Eventually the dollar may become stronger than it is today.

Meanwhile, although the Pakistan rupee has become stronger against the US dollar after racing towards Rs70 to a dollar in 2001; it is about Rs9 to a dollar weaker in relation to the Indian rupee which goes for 49 to a dollar, while the rupee is 57.73 to a dollar. So the basic weakness of the Pakistan rupee is still there.

Hence the Pakistani car and motor cycle makers explain the higher cost of the vehicles in Pakistan vis-a-vis their Indian prices. The Pakistan rupee may have to come up by 9 to a dollar to be at part with Indian, not as weak as the Bangladesh taka.

But the Pakistan exporters do not want a stronger dollar as that can hurt their exports or reduce their profits, and so, like the US exporters, now prefer a cheaper dollar to boost their exports. For the same reason President Bush is not upset by the weaker dollar as that helps improve the US balance of payments and balance of trade which have been negative for too long.

Meanwhile the deputy governor of the State Bank of Pakistan, Tawfik Hussain has come out strongly in defence of keeping the foreign exchange reserves in dollars. He wants Pakistan not to think of only the negative side of the reserves but also the positive side. And he upholds the wisdom and financial sagacity of those who decided to keep the reserves in dollars instead of opting for the euro as it was rising.

He says the State Bank is now busy preparing an investment plan for its reserves. And that plan would soon be officially revealed to allay all fears.—SA