Does Pakistan Really Have "Record" Forex Reserves?

Pakistan's aid donors help bolster its reserves--not financial inflows for the most part.

It is sad that accumulating $20B in reserves--this in a country with a population of 182 million--is considered as a "record." However, that is the case for Pakistan and its recent report on foreign exchange reserves. As chronicled in this blog [1, 2], Pakistan is a habitual borrower from the IMF--a dubious distinction if there ever was one that even the IMF would prefer avoiding. Unfortunately, Pakistan's bolstered reserves, low as they are in ultimate terms--China has over a whopping 175 times more by my estimates--are mostly the result of the IMF juicing up the coffers:

Pakistan’s record foreign-exchange reserves are masking economic weaknesses that risk pushing the nation toward more aid from the International Monetary Fund. At least half of the country’s $20 billion stockpile comprises debt and grants, almost all of which have flowed in since Prime Minister Nawaz Sharif took office in May 2013. That money could leave quickly as Pakistan begins repaying the IMF in 2016 or if oil prices surge, leading to another balance-of-payments crisis.

"This is borrowed money and not a reflection of a stable economy," said Yawar uz Zaman, vice president for research at Karachi-based Shajar Capital Pakistan Pvt. "Finance costs will continue to grow in the years to come, which will mean we will go for another loan from an international lender."

Sharif won a $6.6 billion loan from the IMF soon after taking charge, triggering a stock market rally that has put Pakistan among the world’s best performers. Since then, however, he’s struggled to attract more stable inflows as a shaky global economic recovery damps demand and makes investors wary.

The rest comes with a little help from Pakistan's [self-styled] friends. Other contributions are from non-financial and more political- or security-related sources in the form of the Saudis chipping in another $1.5B and the American-led coalition another $2.8B. In other words, the inflows are not from financially sustainable sources like foreign investment or export proceeds.

People of goodwill wish Pakistan well, but the truth is that it hasn't really done anything to make itself attract more financial inflows outside of charity. Pakistan remains, in the words of Anatol Lieven, a hard country.