Economic growth is the only suitable means of enhancing the living standard of people while foreign exchange can be utilized as productive capital to enhance economic activities not only to help earn foreign exchange but also to help attain higher development of the economy, according to experts.
There has been a strong unidirectional causality from foreign aid to Gross Domestic Product (GDP). This assists to conclude that foreign aid has a significant contribution to economic growth.
| Liquid Foreign Exchange Reserves In Pakistan (Million US$) | |||
|---|---|---|---|
| Period | Net Reserves With SBP | Net Reserves With Banks | Total Liquid FX Reserves |
| 07-Jan-2022 | 17,597.9 | 6,303.5 | 23,901.4 |
| 04-Feb-2022 | 17,336.8 | 6,384.1 | 23,720.9 |
| 04-Mar-2022 | 16,212.2 | 6,456.5 | 22,668.7 |
| 01-Apr-2022 | 11,319.2 | 6,157.7 | 17,476.9 |
| 06-May-2022 | 10,308.7 | 6,067.0 | 16,375.7 |
| 03-Jun-2022 | 9,226.2 | 5,950.3 | 15,176.5 |
| 07-Jul-2022 | 9,717.5 | 5,893.0 | 15,610.5 |
| 05-Aug-2022 | 7,830.3 | 5,730.8 | 13,561.1 |
| 02-Sep-2022 | 8,799.9 | 5,673.6 | 14,473.5 |
| 07-Oct-2022 | 7,596.9 | 5,649.9 | 13,246.8 |
| 04-Nov-2022 | 7,957.0 | 5,764.0 | 13,721.0 |
| 02-Dec-2022 | 6,714.9 | 5,866.8 | 12,581.7 |
| 06-Jan-2023 | 4,343.2 | 5,844.6 | 10,187.8 |
| 03-Feb-2023 | 2,916.7 | 5,622.9 | 8,539.6 |
| 03-Mar-2023 | 4,301.0 | 5,453.0 | 9,754.0 |
| 10-Mar-2023 | 4,319.1 | 5,527.7 | 9,846.8 |
| Source: SBP | |||
To improve the economic growth of developing states, they also identified that foreign aid is a significant source of finance but poor states are unable to reach the stage of take-off due to inadequate aid support.
Furthermore, increased foreign exchange reserve reduces the cost of liquidity risk. A few remarkable empirical studies are carried out to observe the relationship between economic growth and foreign exchange reserve. It is concluded that economic growth has both short-run and long-run relationship with the foreign exchange reserve. The foreign exchange reserve has a positive impact on economic growth, but high economic growth does not support increasing foreign exchange. Furthermore, the less developed countries set the goal to attain additional foreign currency to attain higher economic growth. Accumulation of foreign exchange reserves contributes to the economic growth of developing economies by increasing both the investment/GDP ratio and capital productivity.
Foreign exchange is an external stock of assets that is normally managed by the central monetary authority of a nation to influence the exchange rate and stabilize the economy to achieve broader economic objectives. When foreign reserve increases because of a rise in the export of goods and services that would be better for the economy to generate more jobs and strengthen the internal economy as well.
Pakistan’s scenario
According to the State Bank of Pakistan (SBP), Pakistan’s foreign exchange reserves held by the central bank grew by 0.4 percent on a week-on-week basis to $4.3 billion. On March 10, 2023, the SBP’s foreign currency reserves reached $4,319.1 million, up by $18 million as against $4,301 million at the start of March 2023. Overall, the liquid foreign currency reserves held by the country, counting the net reserves held by banks other than the SBP, reached $9,846.8 million. The net reserves held by banks amounted to $5,527.7 million.
Any further improvement in Pakistan’s foreign currency reserves level depended on the revival of the International Monetary Fund’s (IMF) loan program and the inflow of fresh financing from other multilateral and bilateral creditors. They (forex reserves) are projected to increase to almost $7-8 billion by the end of the current fiscal year by June 2023. Pakistan’s reserves have continued to enhance after SBP opted to buy US dollars from the interbank market in wake of a surge in the supply of the greenback compared to its demand.
The availability of surplus US dollars in the interbank market has prompted the central bank to intervene (buy the surplus).
In last, I would like to mention here, developing states should try to raise foreign direct investment (FDI), but this is not easy to attain. They should try to generate internal resources by checking capital flight and encouraging external development assistance. Achievement of higher economic growth utilizing foreign exchange reserves is a time-consuming process. This requires a massive amount of funds and deep policy reform. So, the mobilization of foreign exchange for higher growth is not free from debate.
Unluckily, Pakistan is presently facing various challenges that are significantly impacting the standard of living of citizens. These include high inflation, a widening trade deficit, and a shortage of foreign currency reserves. One of the main reasons for the crisis is the country’s chronic energy crisis, which is causing widespread disruption to industry and commerce. Prompt action is required to address this issue, like investing in new power generation capacity and implementing energy efficiency measures.
Pakistan’s political history is marked by decisions that were made without consideration for their economic consequences, and political unrest has only exacerbated the challenge. Every year, new budget and economic strategies are introduced, which undermines the confidence of financiers and development partners. Pakistan’s tax-to-GDP ratio is presently recorded at 8.6 percent, far below the average of almost 16 percent in emerging market countries.