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Recent Macroeconomic Developments and Implications for Poverty and Employment in Pakistan: The Cost of Foreign Exchange Reserve Holdings in South Asia

Listed author(s):
  • Talat Anwar


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    After a retarded economic growth over the past few years, a recovery in economic growth rate began as result of faster growth in industrial sector and respectable growth in services sectors. Although macroeconomic stability has been achieved, the reduction in fiscal deficit was also at the expense of public sector development and social sector expenditure over the past few years. While acceleration and pattern of economic growth together with stagnant investment are not propoor since sufficient employment is not likely to be created, the recent surge in food inflation will hurt the poor. While economic reform programmes undertaken within the framework of IMF/World Bank over past 15 years were aimed at increasing efficiency and/or reducing poverty, the trends in various dimensions of poverty indicate that absolute poverty and inequality have worsened and progress in human development dimensions remained poor in Pakistan. Another striking development was the substantial improvement in the capital inflows in the form of worker’s remittances due to the increased scrutiny of undocumented foreign currency transaction after September 11. Since the focus of exchange rate and thus the monetary policy has been on avoiding the appreciation of Pak rupee to preserve export competitiveness, State Bank of Pakistan purchased foreign currency heavily stemming from increased workers’ remittances resulting in an exceptional rise in foreign exchange reserves. While foreign exchange reserve accumulation is seen as an achievement, maintaining high level of reserves involves a heavy cost. It is worth noting that the costs to poor nations are benefits in terms of low interest loans to the nations that supply reserve currencies primarily the United States. Notably, Pakistan bears the highest annual cost of foreign exchange reserves holdings at 3.3% of GDP (US$2.5 billion) in south Asia followed by India, if compared as percent of GDP. Thus, by diverting resources from more productive uses in order to accumulate high level of foreign exchange reserves both India and Pakistan, have significantly impeded economic and social progress over the past few years. This explains why the poor are not benefiting from the recent macroeconomic gains in south Asia. It must be recognized the foreign exchange reserves are the national savings which a nation acquires through running current account surpluses. If the government utilized the foreign exchange reserves on foreign goods and services for the development of infrastructure in the country, it would not be inflationary. Thus, saving of the nations should be utilized efficiently by investing it in physical infrastructure and human capital which would generate sufficient employment and reduce poverty in south Asia.

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    Paper provided by The Australian National University, Australia South Asia Research Centre in its series ASARC Working Papers with number 2004-14.

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    Length: 23
    Date of creation: 2004
    Handle: RePEc:pas:asarcc:2004-14
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    1. Tilat Anwar, 1996. "Structural Adjustment and Poverty: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 911-926.
    2. Mohammad, Irfan & Amjad, Rashid, 1994. "Poverty in rural Pakistan," MPRA Paper 38335, University Library of Munich, Germany.
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