How Can Pakistan Build Up and Manage Dollar Reserves?

[RiazHaq]

https://www.southasiainvestor.com/2018/07/how-can-pakistan-build-up-and-manage.html

Every country needs US dollars to import products because the US dollar is the international trade and reserve currency. Only the United States can print dollars; all others must acquire them through exports and capital inflows like investments, remittances and loans. Pakistan has had serious problems in acquiring sufficient amount of dollars for its needs through trade and investments over the last several decades. It has been forced to seek IMF bailouts repeatedly.

China, India and East Asia:

China and other East Asian nations have built up large dollar reserves by running massive trade surpluses mainly through exporting lots of products and services to the rest of the world.

Others, such as India, have built up significant US dollar reserves in spite of running large trade deficits. India relies mainly on foreign investments, remittances from non-resident Indians and foreign debt for its dollar reserves.

India is consistently ranked among the top recipients of foreign direct and portfolio investments as percentage of its GDP.

Pakistan's Foreign Investment and Trade:

Like India, Pakistan also runs large trade deficits. It also depends on foreign investments, remittances from overseas Pakistanis and foreign debt for its dollar reserves. So why does Pakistan have serious recurring balance of payments crises?

Unlike India, Pakistan ranks very low among recipients of foreign direct and portfolio investments as percentage of its GDP. . Part of it is the perception of insecurity since 911. The real security situation has dramatically improved in the last few years but the perception continues to lag.

Pakistan's exports have also lagged behind India's as percentage of gross domestic product (GDP). In fact, Pakistan's exports have halved from about 16% of GDP in 2003 to 8% of GDP in 2017. India's exports have increased from 15% to 19% of GDP in the same period, according to the World Bank.


Exports as Percentage of GDP. Source: World Bank


Export-Orientation of Industries:

Pakistan has a fairly diverse industrial sector which caters to its domestic market. People running these businesses and industries have little or no knowledge of the customer needs and regulatory requirements of foreign markets where their products or services could be sold to boost Pakistan's exports and dollar earnings.

Pakistan's economic attaches posted at the nation's embassies need to focus on all export opportunities in international markets and help educate Pakistani businesses on the best way to take advantage of them. This needs to be concerted effort involving various government ministries and departments working closely with industry groups.

Illicit Capital Flows:

Pakistan's new government led by the Pakistan Tehreek e Insaf Chief Imran Khan needs to urgently crack down on illicit outflow of dollars. One of the ways large amounts of money across international borders id through trade misinvoicing.

Global Financial Integrity (GFI) defines trade misinvoicing as "fraudulently manipulating the price, quantity, or quality of a good or service on an invoice submitted to customs" to quickly move substantial sums of money across international borders.

How does trade miscinvoicing work? Here's an example:

Let's say an exporter in Pakistan exports goods worth $1 million to a foreign country and invoices it at $500,000 through an offshore middleman. The middleman invoices and collects $1 million from the end customer, sends $500,000 to Pakistan and deposits $500,000 in an offshore account. The result: Pakistan is deprived of the $500,000 in foreign exchange.

Similarly, imports of goods worth $1 million to Pakistan are overinvoiced at $1.5 million through an offshore middleman and the difference is kept in an overseas account. The result: Pakistan loses another $500,000 in foreign exchange. Meanwhile, the Pakistani traders and the officials facilitating misinvoicing together pocket $1 million or 50% on the two trades. Pakistan's trade and current account deficits grow and the foreign exchange reserves are depleted, forcing Pakistan to go back to the International Monetary Fund (IMF) for yet another bailout with tough conditions.





Terror and Drug Financing:

It is not just greedy politicians, unscrupulous businessmen and corrupt officials in developing countries who rely on fraudulent manipulation of trade invoices; all kinds of drug traders, terrorists and criminals also use what is called TBML (trade-based money laundering).

John A. Cassara, former US intelligence official with expertise in money laundering, submitted written testimony for a US Congressional hearing on “Trading with the Enemy: Trade-Based Money Laundering is the Growth Industry in Terror Finance” to the Task Force to Investigate Terrorism Financing Of the House Financial Services Committee February 3, 2016. Here's an except from it:

"Not long after the September 11 attacks, I had a conversation with a Pakistani entrepreneur. This businessman could charitably be described as being involved in international grey markets and illicit finance. We discussed many of the subjects addressed in this hearing including trade-based money laundering, terror finance, value transfer, hawala, fictitious invoicing, and counter-valuation. At the end of the discussion, he looked at me and said, “Mr. John, don’t you know that your adversaries are transferring money and value right under your noses? But the West doesn’t see it. Your enemies are laughing at you.”"

Summary:

Pakistan needs to find a way to build up and manage significant dollar reserves to avoid recurring IMF bailouts. The best way to do it is to focus on increasing the country's exports that have remained essentially flat in per capita terms. Pakistan's economic attaches posted at the nation's embassies need to focus on all export opportunities in international markets and help educate Pakistani businesses on the best way to take advantage of them. This needs to be concerted effort involving various government ministries and departments working closely with industry groups. At the same time, the new government needs to crack down on illicit outflow of dollars from the country.

Related Links:

Haq's Musings

South Asia Investor Review

Money Laundering Through Trade Misinvoicing

Pakistan Economy Hobbled By Underinvestment

Raymond Baker on Corruption in Pakistan

Nawaz Sharif Disqualified

Culture of Corruption in Pakistan

US Investigating Microsoft Bribery in Pakistan

Remittances From Overseas Pakistanis

Politics of Patronage in Pakistan

Why is PIA Losing Money Amid Pakistan Aviation Boom?

https://www.southasiainvestor.com/2018/07/how-can-pakistan-build-up-and-manage.html

 

[Umair Nawaz]

excellent and informative thread.

 

[Yaseen1]

we need some innovative economic and business ideas.we should develop new type of currency like bitcoins which foreigners buy and dollars will come in Pakistan

 

[SoulSpokesman]

@RiazHaq

Brof sb,

One of the reasons why India's exports/GDP looks very good is as you have yourself insinuated in the past, that a lot of IT services export is (mis)classified as exports.

With CPEC benefits likely to kick in by H2 next CY, Pakistan's exports should grow exponentially and hopefully some of the financing/forex related concerns should abate.

Regards

 

[Samlee]

Number 1 We Should Start Concentrating On Skilled Labour Export.There Are Certain Fields Like Big Data,Network Security and Software Testing Where There Is A Dearth Of Skilled Programmers.Also The Apps Boom Has Also Created The Need For A Large Number Of Programmers.Similarly The Construction Sector Is Another Area Where There Is A Shortage Of Skilled Labour.Also Japan and Europe Have A Severe Shortage Of Medical Professionals.That Is Another Area.

Then There Are Countries Like Germany Japan,Singapore And Canada Which Have Chronic Skills Crunch Which Is Severely Affecting There Economy.I Can Go On and On.

Then Apart From That We Should Compete Take Some Of The Labour Intensive Low End BPO Work Since India Is Not As Cost Competitive As It Once Was.

Another Thing Is To Manage Our Imports.It Is Highly Unfortunate That India Can Buy Oil From Iran With Their Rupees While We Can't Do The Same Thing With Electricity and IP Natural Gas.We Have An Energy Superpower As Our Neighbour Who Is Ready To Supply Us Our Needs On Highly Favourable Terms But Our Leadership Is A Most Accursed One.


More Than A Third Of Our Import Bill Is Energy And Getting Iran To Accept Rupees For Payment Will Do Wonders For Our Forex.

Also We Should Get Chinese To Redirect Some Of Their Shipping From Dubai To Karachi And Pay In Yuan.This Yuan Can Be Used To Make Purchases From China Who Is Our Largest Supplier Of Non Energy Goods.

Lastly While Our Coffers Are Empty Our Granaries Are Overflowing.Tight Now We Have 10 Million Tons Of Wheat.Iran Desperately Needs Food Supplies.Last Year Russia Agreed To Supply Iran With 5 Million Tons.This Could Have Been Our Contract.We Should Offer Our Grain In Return For Gold Which Will Be Much More Useful Than Just Dollars.

 

[I S I]

Simple: increase the Exports to Imports ratio which is currently heavily unbalanced.

 

[WarKa DaNG]

We need to start a barter system instead of using USD

 

[MBT 3000]

what about gold reserves?

 

[Samlee]

what about gold reserves?

I Think We Have $2.5 to $3 Billion Of Gold And We Can Increase Read The Last Part of My Post Above

 

[RiazHaq]

@RiazHaq

Brof sb,

One of the reasons why India's exports/GDP looks very good is as you have yourself insinuated in the past, that a lot of IT services export is (mis)classified as exports.

With CPEC benefits likely to kick in by H2 next CY, Pakistan's exports should grow exponentially and hopefully some of the financing/forex related concerns should abate.

Regards

First, India still runs huge trade deficits year after year. It has to rely on foreign investments and borrowings mainly from the West to avoid going to the IMF.

http://www.riazhaq.com/2015/04/can-indian-economy-survive-without.html

Second, it is a fact supported by US trade data. US import figures from India differ sharply from India's export figures to US.

" The large gap between the U.S. and Indian data mainly reflects differences in how BEA and India define BPT services. BEA data are consistent with international standards for balance of payments accounting; India’s data, which are based on data from an Indian trade association, do not conform to international standards. In fact, a 2005 study published by the Reserve Bank of India (RBI) showed that computer services exports (a large component of BPT services) to the U.S. based on international standards are much lower than India’s published data (chart 1, right panel).2 In addition, a 2004 report by the OECD found that 97 percent of India’s exports of computer services to large OECD member countries were unaccounted for in those countries’ data on imports.3

Depending upon how one adjusts for important definitional differences, the gap between the U.S. and Indian estimates either entirely disappears or is substantially reduced."


https://www.riazhaq.com/2014/11/us-government-explains-20x-difference.html

 

[Dil Pakistan]

Buy the Gold and build its reserves - ditch the dollar and trade in currencies of relevant countries (China, Iran, Russia, Turkey).

 

[RiazHaq]

Buy the Gold and build its reserves - ditch the dollar and trade in currencies of relevant countries (China, Iran, Russia, Turkey).

https://www.riazhaq.com/2010/03/yuan-to-replace-dollar-in-world-trade.html

It has long been recognized that the US dominance in global affairs is at least partly attributable to the US dollar as the world's biggest reserve and trading currency. Nearly two-thirds of the world's central-bank reserves are denominated in US dollars, according to data from the International Monetary Fund. The euro accounts for about a quarter -- up from 18% when it was introduced in 1999, but less than its predecessor currencies' share in 1995. Because the U.S. is such a huge trading partner for so many countries, the reserve buildup isn't easily unwound.



According to the Wall Street Journal, the dollar is also deeply entrenched in world trade. Businesses lower their transaction costs by dealing in a common currency. More than 80% of exports from Indonesia, Thailand and Pakistan are invoiced in dollars, for instance, according to the latest figures available in research by the European Central Bank, although less than a quarter of their exports go to the U.S.

Taking a page from the history of US rise in the last century, the Chinese efforts on currency appear to be only the first part of its larger push to assert its status as a new superpower of the twenty-first century. In a piece interestingly titled "It’s China’s World. We’re Just Living in It" in the latest issue of Newsweek, the authors argue that the Chinese are looking to reshape the world with China at its center. The larger plan includes the creation of a new framework with a new set of international institutions through which the Chinese can exercise their power.

While many nations want to change at least part of their reserve holdings from US dollars to euros or other alternatives, they know if they sell a significant share of their dollar reserves, it would weaken the dollar's value. That would potentially hurt their own trade competitiveness, and push down the value of their remaining dollar reserves. If they keep the dollars, a buildup of unwanted assets would only mount.

 

[Baghial]

we didnt built dams to reserve any free water........

where will we find free dollars for a reserve.........

declare pakisatn,,,,,,,,,,,...........safe heaven for all thiefs, dacoits,, burgulars, commission khors,, money llaundrers... mafias,, bhattakhors.. .........

but we did that allready============ but they hide there money is swiss- panama- marshal island=british no so virgin island-- dubai= qatar

we should demand these countries not our money back-------- but just some seats in there govt,, assemblies==
watch how quickley they will return our money with soooooooooooooooooooooood

 

[AyanRay]

First, India still runs huge trade deficits year after year. It has to rely on foreign investments and borrowings mainly from the West to avoid going to the IMF.

http://www.riazhaq.com/2015/04/can-indian-economy-survive-without.html

Second, it is a fact supported by US trade data. US import figures from India differ sharply from India's export figures to US.

" The large gap between the U.S. and Indian data mainly reflects differences in how BEA and India define BPT services. BEA data are consistent with international standards for balance of payments accounting; India’s data, which are based on data from an Indian trade association, do not conform to international standards. In fact, a 2005 study published by the Reserve Bank of India (RBI) showed that computer services exports (a large component of BPT services) to the U.S. based on international standards are much lower than India’s published data (chart 1, right panel).2 In addition, a 2004 report by the OECD found that 97 percent of India’s exports of computer services to large OECD member countries were unaccounted for in those countries’ data on imports.3

Depending upon how one adjusts for important definitional differences, the gap between the U.S. and Indian estimates either entirely disappears or is substantially reduced."


https://www.riazhaq.com/2014/11/us-government-explains-20x-difference.html

India does not depend upon borrowings to avoid going to the IMF. Well, if you consider FIIs investment into Indian company bonds, then yes, but those are different from what Pakistan is doing now. A major chunk of our external debt consists of these bonds sold by Private companies.
And in whatever way you want to look at it, India does maintain a significant services surplus, about USD50 billion anuallan. Then you add the remittances of about USD 72 billion and we have almost covered our trade defecit. What comes after that in terms of FDI and loans provides us a comfortable BOP surplus.

Edit: About the link you provided, will India survive without Western support- One of the stupediest ligic I have ever come across. We are taking about foreign exchanges/reserves here, of course the money has to come from Western countries in form of investments, trade or loans, we don't print it. What do you think if US/EU puts economic sanctions on China, will it survive? I know they won't because it will hurt there businesses too. Ditto with India, they invest in India because they know the returns will be massive.

 

[Samlee]

India does not depend upon borrowings to avoid going to the IMF. Well, if you consider FIIs investment into Indian company bonds, then yes, but those are different from what Pakistan is doing now. A major chunk of our external debt consists of these bonds sold by Private companies.
And in whatever way you want to look at it, India does maintain a significant services surplus, about USD50 billion anuallan. Then you add the remittances of about USD 72 billion and we have almost covered our trade defecit. What comes after that in terms of FDI and loans provides us a comfortable BOP surplus.

Edit: About the link you provided, will India survive without Western support- One of the stupediest ligic I have ever come across. We are taking about foreign exchanges/reserves here, of course the money has to come from Western countries in form of investments, trade or loans, we don't print it. What do you think if US/EU puts economic sanctions on China, will it survive? I know they won't because it will hurt there businesses too. Ditto with India, they invest in India because they know the returns will be massive.

No Not Necessary.What You Call Foreign Investments Most Of It Is Actually External Commercial Borrowings By Your Corporations Taking Advantage Of Low Interest Rates In The West.

Actually It Is Pretty Smart Way To Build Reserves Without Going To IMF But It Still Makes One Vulnerable???And The Trouble With India Is That It Has Developed A Dangerous Addiction To Foreign Capital Inflows.Even Slowing Down Of These Inflows Has Ramifications For India's Economy.

Buy the Gold and build its reserves - ditch the dollar and trade in currencies of relevant countries (China, Iran, Russia, Turkey).

That's What I've Been Screaming All Along