Written By: Afreen Baig
Foreign Reserves – a significant economic indicator and of vital importance to every expanding economy. Foreign Reserves is the first and basic economic indicator that transmits an air of confidence and trust, amongst the potential foreign & local investors and the nation. Foreign Reserves are held in abundance and accumulated – in order to sustain the confidence of a country’s capacity to carry out external trade confidently, to balance the momentum between demand & supply of foreign currencies, and also used as an intervention tool by the State Bank. Reserves also bail out the economy in times of financial crisis.
By October 2007, at the end of Prime Minister Shaukat Aziz’s tenure, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion. His exceptional policies kept our trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8.4 billion.
Pakistan recently has seen a drastic drop in its Reserves by 50% and its currency devalued by 40%, which has left ordinary people confused and the usual cynics have started heaping the blame onto the policies of Mr. Shaukat Aziz, without even knowing the basic macro-economic indicators nor understanding the relationship b/w Foreign reserves, Trade deficit and Currency devaluation.
The Trade deficit (Exports minus Imports) is always managed in ratio to Revenue generation, Capital inflows and Reserves. Almost all developing economies face the dread of trade deficit but their abundant foreign reserves gives them the fiscal space to overcome those grievances.
Written By: Honorable Shaukat Aziz, ex-Prime Minister of Pakistan
2009: When I was asked to write a piece on the economic way forward, I hesitated at first because I felt that with a new government in place it is better that we leave the way forward to the new economic managers, rather than play the role of back seat drivers and provide unsolicited advice. But the mountain of criticism of the previous government policies from all sorts of arm chair critics, ranging from retired bureaucrats and economists of the cold war era, who still believe in the supremacy of state management of the economy and for whom Venezuela and Bolivia are the new role models, to Islamists who feel that the entire western global economic system is doomed and we need to chalk out a new paradigm – convinced me that perhaps the time had come to analyze the past and set the record straight, assess the current situation and contribute to the debate on the way forward.
Now that we have the political parties of the nineties back in power it can be instructive to examine a few economic indicators of the nineties with the past eight years and draw inferences. Since the economic growth numbers have been challenged by the critics. I will use numbers that are not subject to disagreement. So for example, if the GDP growth numbers are being challenged, than other growth indicators that the public can understand can show the reality. The official GDP growth from around US $ 65 billion in 1999-2000 to US$ 165 billion in 2007-08 (a factor of 2.5 times) is challenged as being fudged, but growth of credit to the private sector over the same time period from Rs 1 trillion to Rs 2.5 trillion, again a factor of 2.5 times, cannot be challenged.
Courtesy: South Asia Investor Blogspot
Is Shaukat Aziz to Blame?
Former Prime Minister Shaukat Aziz is frequently blamed in Pakistani media and political and economic circles for the rapid decline of Pakistan’s economy during the last six months. The critics say the economic boom under Mr. Aziz was short-lived because it was achieved by easy, plentiful consumer credit, massive borrowing and construction spending in public and private sectors. They further charge that Mr. Aziz promoted the service sector while ignoring large infrastructure projects to enhance Pakistan’s agricultural and industrial sectors. They also claim that, if Mr. Aziz had done a good job, the economy would have continued to perform well in spite of all the changes that have transpired since he quit. Some go to the extent of claiming that there was no real economic boom and the whole boom story was a fabrication.
How Do Modern Economies Work?
To examine the validity of the charge sheet against Mr. Aziz, let us try and understand how modern economies work. Modern economies are all consumer driven and cyclical. To manage growth in modern economies, there are a number of tools and policy options deployed by economic leadership consisting of government and central bank officials. Controlling money supply is a key tool. When the economy is slowing, the governments resort to deficit spending, and central banks lower interest rates to encourage consumer borrowing. Government and consumer spending then produce increased demand for goods and services which encourage more investment in plant, equipment and real estate etc. These investments create jobs which further stimulate demand.