DOLLAR reserves are shrinking as quickly as a popped balloon; the exchange rate is at an all-time high, while yields on our international bonds have gone through the roof.

In short, we’re running out of dollar bills to pay for food and fuel imports. Yet the much-awaited inflows from the International Monetary Fund (IMF) are at least a month away.

A rather novel idea, which has emerged amidst the search for quick fixes, calls on the government to sell its gold reserves for dollars.

Or, as a couple of financial experts suggest, the state-owned precious metal can at least be pledged as security for borrowing greenbacks from global banks at affordable interest rates.

In the search for quick fixes, some experts suggest govt can leverage its gold reserves for dollars; not everyone thinks it’s a good idea

The State Bank of Pakistan (SBP) holds as much as $3.82 billion worth of gold — that’s more than half the total funds that the IMF is expected to disburse under its current loan programme. The SBP-held foreign exchange reserves amounting to $9.7bn don’t include the current value of gold reserves.

“We should seriously consider pledging this gold with some banks in the Middle East or China and borrow against it to generate dollars,” said Asif Qureshi, executive chairman of Optimus Capital Management, a Karachi-based brokerage and financial advisory company.

“These gold reserves don’t generate any returns. They have no practical use for anyone. Since no international bank is currently willing to lend us funds, the government should think about utilising these gold reserves to generate dollars,” he told Dawn on Wednesday.

Loans that have gold as collateral carry minimal interest rates. After all, gold is a tangible asset that’s been used as a store of value for thousands of years in every part of the world.

SBP’s former deputy governor Riaz Riazuddin said using gold reserves to borrow dollars is a “very good proposal”. But the process of pledging requires that the asset be physically taken out of the vaults of the borrowing nation and shipped off overseas. “That’ll be extremely bad optics,” said Mr Riazuddin, who also briefly served as acting governor of the central bank.

“The proposal should be actively pursued only if the economic managers can bring in dollars without getting the gold bricks shipped out of the country,” he said.

Topline Securities CEO Mohammed Sohail also called for monetising gold reserves. “Why can’t #Pakistan use/pledge its USD4b worth of Gold reserves?” he tweeted on Thursday, while referring to India that pledged gold in 1991 to fight a foreign exchange crisis.

Relic of ‘gold standard’ days

Pakistan’s gold reserves date back to the long-forgotten days of the gold standard when currencies were convertible into gold at a fixed price. The entire world went off the gold standard completely when President Nixon abandoned it in 1971 to stop foreign governments from redeeming dollars for gold at a fixed price amid rising inflation in the United States.

Government-issued fiat money — i.e. all kinds of money that are made legal tender by a government decree — has since replaced the gold standard. Central banks now control the supply of money using tools such as interest rates, note printing and bank reserve requirements.

But if there’s no use of gold reserves in a modern economy with fiat money, why do so many central banks still keep some of their holdings in the precious metal? According to one economist, these are kept as a contingency measure in the case of war or sudden trade sanctions.

For example, the United States has unilaterally restricted sovereign states like Russia, Iran and Afghanistan from accessing their own foreign exchange reserves in the recent past. Gold comes in handy in such circumstances.

“Rogue” nations circumvent international trade sanctions by using their gold reserves to import food and oil. It’s been a universally accepted medium of exchange since time immemorial because its intrinsic value is determined by markets, not governments. In fact, the well-worn expression of “sound money” literally comes from the metallic ring of a gold coin dropping onto a hard surface.

Selling the ‘family silver’

If gold reserves offer such an easy short-term fix to our perennial balance-of-payments crisis, why didn’t any government resort to it in the past? Simply put, gold reserves are like an asset — or family silver, to put it colloquially — that gets handed down like an heirloom from one generation to the next.

“People get upset when a motorway gets pledged for a routine Sukuk transaction. It’d be a scandal if the government sold or pledged gold for hard cash,” said Mr Qureshi.

Miftah Ismail, chief economic fire-fighter in the coalition government, appeared to be in no mood to support the idea that comes with a “highly flammable” warning sign. No such proposal is under consideration, he said. “We’re not going to either sell or pledge gold to raise dollars,” he told Dawn between hurriedly called press conferences on Thursday.

The chief spokesperson for the SBP, which is in physical possession of gold reserves, didn’t respond to a request for comment until the filing of this report.

The gold-for-dollars idea was termed “stupid” and “idiotic” by Dr Kaiser Bengali, a left-leaning development economist with stints in the Sindh and Balochistan governments.

“The balance-of-payments crisis will re-emerge within no time, even if you sell the entire gold reserves at once. It’s illogical to sell national assets for short-term goals,” he said.

He went on to claim that even if the entire stock of foreign loans was miraculously brought down to zero, the same would go back up in a short period of time.

“Our problem is that the increase in imports outpaces the growth in exports. We’ll always be short of dollars if we don’t address the root cause of the problem,” he said.

“Selling gold won’t fix anything,” Dr Bengali said.

Published in Dawn, July 22nd, 2022