Pakistan’s foreign exchange reserves have witnessed an unprecedented increase after the 9\11; they stand at more than $9 billion and are expected to touch $10 billion soon. This is a welcome development as it takes the country out of a serious bind where default haunts everyone. This gives a much-needed breathing space. How should economic managers react to this? Jubilation of the authorities, though out of proportion to their own effort, is understandable, as this would make their life easier. How to use this bonanza is a million dollar question.

According to the State Bank Governor, authorities are contemplating to use reserves to retire, prematurely, expensive external debt to reduce the burden of debt servicing. This would be a good short-term accounting decision, but based on short-sightedness. It would ignore factors responsible for the accumulation of reserves, not caring to look whether they are permanent or short-lived, and unsustainable in the long run.

Before going into these aspects, it would be worthwhile to jog our national memory and show enough maturity, after half a century, of at least leaning once from our own history. It may be recalled that a similar situation arose in early fifties due to the Korean War and the resulting so-called Korean boom. The size of the reserves got to the head of the then authorities and they freed imports through the OGL, thus squandering the precious reserves in no time. The boom soon collapsed and Pakistan was caught with empty kitty. What difficulties followed is part of our well-documented economic history and needs no repetition here. The moral is: do not be intoxicated by a temporary short-term benefit and inflict long-term damage.

How the recent accumulation of foreign reserves has taken place is very interesting and significant. According to the analysis given in the State Bank Annual Report 2001-2002, the increase of $2.7 billion held by the SBP during the year reflected an increase of $0.2 billion in disbursement of external debt, $1.3 billion in home remittances and $900 million by way of reward for Pakistan’s key role in the US anti-terrorist campaign and reimbursement for the logistic support to the American forces. All the three factors are directly related to 9\11 and the subsequent US magnanimity necessitated by the marriage of convenience and has little to do with the fundamentals of Pakistan’s economy. All these factors continue.

The sudden pick-up in home remittances, on which a lot of hopes are pinned, needs to be explained. The main increase has been in remittances from the US where special factors came into operation. During 1999-2000, the remittances from this country were only $79.96 million and they increased to $134.81 million in the following year. Then came 9\11 leading to the measures against money laundering, causing the collapse of Hundi system, and a sense of great uncertainty among Muslims in general, and Pakistanis in particular, in the US. Pakistanis, who had parked their savings in the apparent safe haven of the US felt unsafe and began to move out. As other Western countries followed the US in crackdown, the only safe course appeared was to return to Pakistan. As a result, the remittances shot up to $657.13 million during 2001-2002. Since the situation has not eased, but is, in stead, becoming more difficult day-by-day for Pakistanis in the US, the upward trend is maintained. During July-December 2002, the remittances touched $657.13 million mark as compared to $273.95 million in the corresponding period last year.

The uncertainty appears to have also influenced Pakistanis in other Western countries, though not to the extent of the US, and their remittances have also gone up significantly. For instance, the remittances from the UK went up from $81.39 million in 2000-01, to $151.93 million in the following year and were $129.93 million July-Dec 2002 (as against $61.10 million a year earlier). Annual remittances from the non-traditional countries clubbed under “Other countries” also rose from $88.40 million to $265.17 million over this period. During the last half of the 2002, these were $332.72 million as compared to $113.84 million in the same period last year. This exceeded the remittances from Saudi Arabia. Their relative share in total remittance has almost doubled from 8.1 per cent to 15.5 per cent. The result is that remittances from the non-Middle East countries have surpassed this region by a substantial margin. Now the major individual sources of the remittances led by the US with 30.1 per cent of the total remittances are the UAE, 21.9 per cent: Saudi Arabia, 13.2 per cent; the UK, 6.1 per cent and Kuwait, 5.4 per cent. For an idea about the prospects of continuance of the current trend, one must look at the international scenario that is developing very fast.

An important lesson of history for Pakistan is its relations with the US in the past. Pakistan played no less crucial role in the Afghan-Soviet conflict, but as soon as the US purpose was served with the defeat and the withdrawal of Soviet forces from Afghanistan, the US quietly walked away, leaving Pakistan alone to hold the bag. It is still reeling under its impact. Will history repeat itself? The obvious answer is that it will not be so this time. The US has declared its long-term interest in Pakistan but of a nature that would not suit Pakistan. All indications are that the US will not turn its back on Pakistan this time, but turn against it. The sweet diplomatic praise for cooperation lavished on Pakistan apart, the US agenda for the Sub-Continent, for that matter for the whole world, is no secret and the process already initiated is picking up momentum. Every thing is well discussed and need not be dilated upon here. One need not look for the straws in the wind. The danger is clearly looming large on the horizon. There is already a talk of Pakistan after Iraq. It is thus just a matter of time and sequence.

Steadily and surely the screw on Pakistan is being tightened. For this one must look at the US actions and not lend ear to the rhetoric.

Turning to the more immediate problem, the US attack on Iraq, despite the world opposition, according to President Bush, is just a matter of weeks. This will be a cataclysmic event and no one can fully visualize the course of events in the wake of the colossal destruction of men and material in Iraq. In any case, this will unleash many unpredictable forces in the Middle East and world will not be the same. First of all, the likely impact of the expected US-Iraq conflict on employment of Pakistanis in the Middle East must be evaluated. It is universally recognized that the US is after oil resources of Iraq. Will it be satisfied after that or its hunger for oil will be further whetted and would not hesitate to complete the tally? In the latter case, the other oil-bearing weaklings of the Middle East would fall like ninepins. Under the best of new circumstances, Pakistanis, for that matter most foreign labour, would not find the environment so hospitable. Therefore, there would be a strong likelihood of drop in remittances from this region. In that situation, remittances from the US would come in handy. Is there any assurance of their continuance? Apparently, the prospects are only bleak. If the worse come to worst Pakistanis living in the US may not be allowed to send any thing home and the effect can be easily imagined.

It would be shutting one’s eyes to the stark reality on ground to believe that the present Pakistan-US honeymoon will not be turned, sooner than later, into an unpleasant bitter divorce. One should hope and pray that the above prognosis proves wrong. This will be a great miracle. The time honoured saying is, “hope for the best but be prepared for the worst.” For contingency planning, wise men presume the worst case and prepare accordingly, so that they are not caught unprepared. Extra caution is never bad. Pakistan is very vulnerable on the economic front. The present upsurge in the remittances from abroad is God-send, should be appreciated as such and used to reduce the degree of vulnerability so as to be able to face the tremendous shocks, which seem to be in store for Pakistan. For God’s sake conserve whatever foreign exchange comes your way and also ensure its security through proper sagacious deployment. Foregoing a small saving in reduction in the current burden of debt servicing or income on the investment of the reserves is well worth obtaining insurance against what is looming large on the horizon. Listen very carefully to the Divine advice in the Quran, which says, “Cast not yourself into ruin with your own hands.” (2:196) “And keep not thy hand chained to thy neck, nor stretch it out an entire stretching, lest thou sit down blamed and exhausted.” (17:30)