At the end of December last year, India’s total liquid foreign exchange reserves stood at $427 billion. A gradual build-up boosted them to $582bn on Sept 4 — showing a massive increase of 36.3pc in eight months and four days.

Pakistan’s total foreign exchange reserves that stood at $17.93bn at the end of last year went up to $19.961bn on Sept 4, depicting an 11.3pc increase.

Both countries have economic and strategic reasons to follow the same course. But given the fact that Pakistan’s reserve coverage of its imports is far smaller than India’s — six months against 20 months — the State Bank of Pakistan (SBP) would continue to build foreign exchange reserves to take the import coverage closer to India’s. Normally, Islamabad does not compare its import coverage against reserves with India’s but nowadays it does just in case hostilities between the two nuclear-armed nations escalate further or the Indo-China border conflict gets out of hand.

Even if Pakistan and India succeed in normalising their relations after a diplomatic breakthrough for which efforts are underway, Pakistan has lately realised it needs to improve the import coverage of reserves to remain prepared for uncertainties of economic or strategic nature, government officials say.

Islamabad has realised it need to improve its import coverage of reserves to be prepared for uncertainties

That necessitates a sustained growth in exports, remittances and foreign direct and portfolio investments — and a constant check on the import bill, which means freer imports of raw materials for export-based industries, but cautious foreign buying of consumer items.

The tripling of the export credit guarantee limit for British importers of Pakistani goods to 1.5 million pounds, Pakistan’s eagerness to comply with all the EU conditions to remain on its GSP-Plus list, sector-specific incentives for exporters, removal of bottlenecks in settling the claims of export rebates, planned improvement in energy supply to exporters and stricter monitoring of the realisation of export proceeds can help exports grow in the future.

But at the moment, the situation is far from satisfactory. In July-August, Pakistan’s goods’ exports went down more than 4pc year-on-year to $3.58bn. Though this decline can largely be attributed to the super rains that the export hub of the country received during this monsoon — and a rebound in months ahead can be expected — yet the kind of increase in exports required for helping the country’s overall external sector remains a far cry.

During the first two months of this fiscal year, Pakistan received $4.86bn in home remittances. This amount is 31pc higher than the remittances of $3.71bn the country received in July-August 2019.

An effective crackdown on informal remittances and foreign exchange coming in bulk with the overseas Pakistanis returning home after losing jobs abroad are two main reasons for an additional inflow of $1.15bn in just two months. To sustain this rate of growth in the future, the SBP and the Federal Investigation Agency (FIA) should continue to work closely to ensure that illegal foreign exchange transfer into the country does not start again. The government is lobbying intensively with the host countries of the Pakistani diaspora, particularly Saudi Arabia and the United Arab Emirates, to secure some sort of job security for Pakistanis living there.

Time will tell if this lobbying works. Meanwhile, the export of manpower from Pakistan has slumped. In the first eight months of the current calendar year, only 178,161 Pakistani left home for foreign jobs, according to the Bureau of Emigration and Overseas employment. In full year 2019, this number stood at 625,205. So regardless of the current high growth in remittances, the issue of sustainability is very much real because a far smaller number of Pakistanis are getting overseas jobs now and hundreds of thousands of those working in foreign countries have recently returned home. The government says it is gathering data of such Pakistanis.

Some officials admit privately that at least 400,000 of them have come back home in January-August and the returnees also include those that had lost jobs in the Gulf region due to the localisation of jobs there before the outbreak of Covid-19.

A build-up of foreign exchange reserves in the short term seems possible. Even the improvement in the import coverage ratio of reserves may continue till the time Pakistan’s industrial activity does not start moving at a high speed. But what looks really difficult is to continue reserve building in the medium term when the country hopefully returns to the GDP growth trajectory of 5pc or more. Recently released data by the Pakistan Bureau of Statistics shows that the large-scale manufacturing (LSM) output increased 5pc year-on-year in July. In the last fiscal year, LSM had recorded a yearly decline of 10.2pc.

In coming months when LSM would hopefully show continued growth, primarily due to the low-base effect, keeping imports from increasing would be difficult. In July-August, merchandise exports consumed $6.96bn, or 6.3pc lower than in July-August 2019. But within this fiscal year, imports could rise to $4bn a month, up from the current level of $3.5bn, on account of increased foreign buying of raw materials to support industrial revival. Whenever demand for foreign consumer goods begins, the average monthly import bill would rise further. That would start putting pressure on the foreign exchange market if the current high growth of remittances tapers and exports do not start growing sufficiently.

After the recent approval of anti–money laundering and terror financing bills from parliament, one can hope for Pakistan’s exit from the Financial Action Task Force (FATF) grey list. That could prove pivotal in attracting thicker inflows of foreign direct investment. For ensuring a consistent rise in foreign exchange inflows from overseas Pakistanis, the launch of Roshan Digital Accounts that provide a platform to the Pakistani diaspora to invest in equities and debt markets is a welcome move. It would hopefully result in additional foreign portfolio investment. But external debt servicing still remains high due to heavy foreign borrowings during the PTI’s two years in power — and foreign exchange outflows on account of the repatriation of profits and dividends by multinational companies would only increase with economic recovery. It will be interesting to see how the central bank keeps its reserve-building drive in the future.

Published in Dawn, The Business and Finance Weekly, September 21st, 2020