Economics, more than any other social science, is the prime target of art of lying with statistics. Though, extent of its execution may vary on the whims of its executioner. Truth, unfortunately, is its ultimate casualty.
Our economic masters, past or present, never fail to hoodwink their public about true picture of exchange reserves of our country. For instance, it is barely mentioned in the their current bravados that our exchange reserves were more or less stagnant at $1.7 billion level prior to the events of September 11,2001, less than half of that of Bangladesh that was the poor half of once united Pakistan. Of course, any mention of colossal Indian reserves ($65 billion) and their continuous robust growth over the last three decades is a taboo in any scribe on the subject.
But, to our chagrin, donor countries neither accept our claims at their face value nor our interpretation of statistics supplied by our institutions. Their insistence on a close scrutiny of our data pertaining to exchange reserves and budget deficit at our costs and time is, indeed, demeaning. In several instances, both the IMF and the World Bank have even questioned the probity of our statistics and confronted us with embarrassing revelations about their manipulation by the official bureaucracy.
Therefore, first and foremost, it would be an act of infinite wisdom, if the concerned institutions prior to any construction of deductions and inferences upon them promoted an aura of confidence in the integrity of our statistics.
Furthermore, the SBP should educate public at large on importance, character and structure of the exchange reserves and their significance in the realm of economic affairs of the country. Mere crowing on their recent meteoritic rise is not enough. Public and politicians may be slow learners, but SBP would find its staunchest allies in them once they have absorbed their lessons well. Earlier data on reserves should be realigned also on the basis of a universally accepted definition for their meaningful employment in economic and social planning.
The SBP reporting of “liquid” and “ cash” reserves in the Press is quite confusing. If these terms are different in substance, then it should be clarified at the outset. Furthermore, a reader is also confounded on the implication of the term such as “ reserves with banks” If these are the SBP reserves in-transit or in deposits with banks free and clear from any restrictions; then it should be stated unambiguously or still better, not at all reported for avoidance of any confusion in the public mind.
Now on the subject itself, we should restructure our exchange reserves for their endurable growth in value and returns. Instead of a pedestrian exercise in fund placement, its management should reflect finesse and prudence worthy of an upcoming nation. In this vein, some suggestions are outlined in the following paragraphs:
Gold and other precious metals are now viewed as “barbaric” relics from the past and, thus, are no longer in fashion as reserves. In fact, their prices in global markets are subject to wide fluctuations on the basis of their individual supply-demand equilibrium. For example, price of an ounce of gold has seen a peak of $850 with a trough of$275 over the last three decades. Its overall price trend has been downward during this period. Its owners including several central banks have experienced substantial losses in their portfolios due to depreciation in its value, besides, incurring substantial recurring safe keeping costs.
Hence, lustre of gold as a “store” of value has disappeared. Several central banks, in particular, the Reserves Bank of Australia and the Bank of England have sold their gold bullion stocks in recent years and have exchanged them with stable earning assets. It would be a wise course if the SBP avails current high level of gold prices around $320 to an ounce and sell its currently valued $600 million gold reserves for augmenting its cash reserves. Pakistan, thus, can retire some of its high-cost debts with substantial savings in interest costs.
A sound exchange reserves policy entails a dynamic review of international economic trends in currencies, trade and aid flows and external and internal economic factors embracing a country. In our situation, keeping reserves in a single currency such as US dollar is myopic as well as imprudent. Our first priority should be to preserve its portfolio value and then to earn a sound return on our investments on long-term basis.
The US economy and its dollar have been on a downward path for quite sometime similar to its earlier slippery course in 80’s. This was, however, expected due to sever balance of payment problems and lengthening shadows of recession fuelled by erosion in market value of its stocks and shares. Despite an aggressive discount rate policy, the US federal reserve has failed to prop up its national currency so far. Dollar is not expected to fare any better in coming years, and indications are that quite a few nations would ditch it for alternative reserves currencies such as Euro and Japanese Yen.
In my view for a host of reasons, the SBP defence of dollar is imprudent. Even relatively wealthy and strong economies of Europe and Asia have failed to stem the tides of its decline despite their incessant support of it for their own economic interests. Their currencies, thus, have gained as much as 20 percent against US dollar during this year. Therefore, with benign rate of inflation, rising level of overseas remittance and high domestic interest rates, it would be futile for the SBP to defend current Dollar-Rupee parity unless it wants Pakistan to slave on the pattern of Banana Republics that are agalore on a wide scale in Africa and Latin America.
Pakistan’s objectives of poverty alleviation, job creation and reduction in its budget deficit could not be promoted realistically unless its present economic stagnation is overcome quickly. Rejuvenation of our industry and agriculture, in preference to service sector with high capital costs and low employment potential, is necessary towards these goals. However, growth of above sectors is currently hampered due to excessive burden of high costs of capital, energy and other industrial and agricultural inputs that are predominantly imported into the country.
A realistic competitive value of Rupee and its cost of funds structure would set the ball rolling in the right direction. Henceforth, competitive edge of our economy would grow sharper through cost effectiveness of our goods and services for export as well as for domestic consumption in the long run. It is an essential recipe also for revenue growth with out extortion and price stability with out cumbersome regulatory mechanism.
(The writer is the former President of the National Bank of Pakistan)