International studies revealed that a dramatic accumulation in forex reserves has been widely observed in developing countries. In Pakistan, foreign exchange reserves held through the State Bank of Pakistan (SBP) grew $ 3 million on a weekly basis, clocking in $7.96 billion as of November 11, 2022. Total liquid foreign reserves held by the country reached at $13.8 billion. Net foreign reserves held by commercial banks clocked in at $5.84 billion.
Experts identified in their studies that foreign exchange reserves are important assets of a country because they are considerably affected through exchange rate policy, monetary policy, regulations, external instability and the impact of the crisis that may come from the environment. Without the proper reserves the government may be forced to change the trade and exchange rate strategies, which may not be in the long run interest of the country.
|Pakistan: Liquid Foreign Exchange Reserves (Year-End Levels) (Million US$)|
|End Period||Net Reserves With SBP||Net Reserves With Banks||Total Liquid FX Reserves|
During the week closed on November 11, 2022, SBP’s reserves grew by $3 million to $7,959.5 million. The Government of Pakistan proclaimed that the SBP will receive $500 million from the Asian Infrastructure Investment Bank (AIIB) in the ongoing month. The SBP also attained $1.5 billion from the ADB on October 26, 2022 as disbursement of loan for the government of Pakistan.
In September, SBP’s reserves had grown as the central bank received the $1.2-billion tranche from the International Monetary Fund (IMF). Sources recorded that the Saudi Development Fund also rolled over a $3-billion deposit with the SBP, an amount that was because of mature in December 2022. However, this development was not meant to raise foreign exchange as the amount was already part of SBP’s reserves.
Experts recorded that the reserves’ position is critical for the country which has been desperately seeking dollar inflows to meet its balance-of-payments needs. A low level of forex reserves has also put pressure on the currency that has only seen stability in recent days. Studies also identified that the foreign exchange reserves have clear implications for exchange rate stability financial markets, and hence, for overall economic activity. Stakeholders have dissimilar views about reserves holding. Some economists believe that foreign exchange reserves are useless and unutilized as experts criticized the fixed exchange rate system with the argument that it contains unutilized foreign exchange reserves.
Various economists on the other hand, argue that foreign exchange reserves should be there to smooth out the in balance of payments. There is continuous debate about the need to hold reserves. Researchers also revealed that the critics are worried about the cost of holding reserves.
The cost of holding reserves is the investment that nations must forego in order to accumulate reserves holding is small compared to the economic results of exchange rate variations. For instance, a depreciation in the value of the currency , caused by either financial crises or others internal or external shocks, may increase a country’s costs of paying back debt denominated in foreign currency also its costs of imported items. Besides, it also creates high inflation expectations. With high levels of foreign exchange reserves, monetary authorities can purchase national currency in the foreign capital markets, which helps to maintain its value. In summary, the rationale behind reserves holding includes financial external imbalances, intervening in foreign exchange markets and providing a buffer to cushion the economy against future exigencies.