In a conversation with a private news channel on January 7, 2023, Finance Minister Ishaq Dar claimed that the reserves held by the country were $10 billion rather than $4 billion being referred to in the media. The additional reserves that Dar was indicating towards were $6 billion held by commercial banks belonging to their customers.
While the intention behind such statement might be of restoring confidence amongst masses, the impact could be drastically opposite. Experts have called it a highly irresponsible statement specially when the country is already suffering from dollar scarcity.
The government doesn’t own dollars held with commercial banks. Therefore, a statement implying to the contrary can lead to frenzy among depositors resulting in a run on the banks. It is yet to be seen that how bad the depositor’s reaction would be as banks resume business on Monday, January 9.
“If the depositors lose confidence in the government’s ability to protect their dollars, there could be a spree of withdrawals and the prevailing dollar crisis would be further aggravated,” says economist Fahd Ali.
However, the investors have a reason to fear. The PML-N government has a history of freezing foreign currency accounts to avert economic crisis. Back in 1998, after Pakistan successfully tested its nuclear capability, the then Prime Minister Nawaz Sharif directed the State Bank of Pakistan to freeze all foreign currency accounts with an exception of a few, to tackle the situation of capital flight amid global sanctions.
This decision shook consumer’s confidence and many businesses, including foreign banks that as a consequence winded up their operations in the country. However, this time around, the situation is different -- as there are no sanctions, rather the country is faced with a dollar crunch due to the indecisiveness of its financial managers.
The official reserves are lurking around $4 billion as the government repaid loans worth $1 billion to Dubai-based banks during the last week. Currently, the country is awaiting the pending $1.1 billion tranche from the IMF to get itself out of the troubled waters.
While the intention behind such statement might be of restoring confidence amongst masses, the impact could be drastically opposite. Experts have called it a highly irresponsible statement specially when the country is already suffering from dollar scarcity.
“If the depositors lose confidence in the government’s ability to protect their dollars, there could be a spree of withdrawals and the prevailing dollar crisis would be further aggravated,” says economist Fahd Ali.
The government doesn’t own dollars held with commercial banks. Therefore, a statement implying to the contrary can lead to frenzy among depositors resulting in a run on the banks. It is yet to be seen that how bad the depositor’s reaction would be as banks resume business on Monday, January 9.
“If the depositors lose confidence in the government’s ability to protect their dollars, there could be a spree of withdrawals and the prevailing dollar crisis would be further aggravated,” says economist Fahd Ali.
However, the investors have a reason to fear. The PML-N government has a history of freezing foreign currency accounts to avert economic crisis. Back in 1998, after Pakistan successfully tested its nuclear capability, the then Prime Minister Nawaz Sharif directed the State Bank of Pakistan to freeze all foreign currency accounts with an exception of a few, to tackle the situation of capital flight amid global sanctions.
This decision shook consumer’s confidence and many businesses, including foreign banks that as a consequence winded up their operations in the country. However, this time around, the situation is different -- as there are no sanctions, rather the country is faced with a dollar crunch due to the indecisiveness of its financial managers.
The official reserves are lurking around $4 billion as the government repaid loans worth $1 billion to Dubai-based banks during the last week. Currently, the country is awaiting the pending $1.1 billion tranche from the IMF to get itself out of the troubled waters.