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From an interview of former governor State Bank Dr Ishrat Hussein.
Sir, what have been the economic and social implications of increase in the country’s foreign exchange reserves?
One economic implication is that Pakistan has been able to manage its exchange rate without resorting to international financial institutions. We are now in a position to stand on our own feet and are autonomous in our decision-making. The social implication is that when you have a country in which 33% of our population lives below the poverty line, one question that is repeatedly asked is: what is the significance of $12 to 13 billion in reserves as far as the poor people are concerned? Those who question us must realize that the reserves are not for spending purposes but are actually an insurance policy for the future. Let me give you a simple example: when we had reserves below $ 1 billion and if there was a oil price shock then whereby the price would have shot up from $25 a barrel to $50 a barrel, the rupee would have hit Rs. 80, 90 or even 100 to the dollar simply because we could not have sustained that kind of situation. However, today we have seen that although the oil prices have gone up to $58, the exchange rate has remained stable at around Rs. 59.50. Secondly, we used to look for even $ 100 million of loan to bring in machinery into our country. However, during the last 5 years, $15 million worth of machinery has been imported out of our resources without us resorting to taking loans from anywhere. And that is laying the foundation of the future investment and growth in this country.
Sir, your tenure has witnessed macroeconomic stability and a stable economic growth. But don’t you think, the benefits of growth are restricted to only a small minority of the population and are not shared widely?
I think this is a misunderstanding, almost a cliché because previously, there was a widespread disapproval that we are in a state of default. So when the default was averted, the critics said that the government is caught in the stranglehold of IMF and following its dictates and there is no increase in the growth rate. Now the growth rate is on the rise and people have started saying that this growth rate is only for the privileged few and it doesn’t not have a trickle down effect. Now in any economy, what does growth means? Growth means that the income of an average citizen has risen as compared to the previous income in the real terms after adjusting for inflation. It is true that the top 20% of the household get 50% of the total income and the bottom 20% of the household get merely 7%. So to that extent it is true that the ratio is tilted towards high income bracket household but then this category of household is also saving some of its income and investing too. And when they invest, employment is generated and people are lifted out of the poverty.
It’s important to note that during the last three years, the growth rate has been on an upward spiral and if the trend continues, employment opportunities will expand and poverty will reduce. Yet we are highly impatient and want results overnight. Actually it will take quite a few years of sustained economic growth before we see a reduction in poverty.
A conversation with Dr. Ishrat Hussain
Sir, what have been the economic and social implications of increase in the country’s foreign exchange reserves?
One economic implication is that Pakistan has been able to manage its exchange rate without resorting to international financial institutions. We are now in a position to stand on our own feet and are autonomous in our decision-making. The social implication is that when you have a country in which 33% of our population lives below the poverty line, one question that is repeatedly asked is: what is the significance of $12 to 13 billion in reserves as far as the poor people are concerned? Those who question us must realize that the reserves are not for spending purposes but are actually an insurance policy for the future. Let me give you a simple example: when we had reserves below $ 1 billion and if there was a oil price shock then whereby the price would have shot up from $25 a barrel to $50 a barrel, the rupee would have hit Rs. 80, 90 or even 100 to the dollar simply because we could not have sustained that kind of situation. However, today we have seen that although the oil prices have gone up to $58, the exchange rate has remained stable at around Rs. 59.50. Secondly, we used to look for even $ 100 million of loan to bring in machinery into our country. However, during the last 5 years, $15 million worth of machinery has been imported out of our resources without us resorting to taking loans from anywhere. And that is laying the foundation of the future investment and growth in this country.
Sir, your tenure has witnessed macroeconomic stability and a stable economic growth. But don’t you think, the benefits of growth are restricted to only a small minority of the population and are not shared widely?
I think this is a misunderstanding, almost a cliché because previously, there was a widespread disapproval that we are in a state of default. So when the default was averted, the critics said that the government is caught in the stranglehold of IMF and following its dictates and there is no increase in the growth rate. Now the growth rate is on the rise and people have started saying that this growth rate is only for the privileged few and it doesn’t not have a trickle down effect. Now in any economy, what does growth means? Growth means that the income of an average citizen has risen as compared to the previous income in the real terms after adjusting for inflation. It is true that the top 20% of the household get 50% of the total income and the bottom 20% of the household get merely 7%. So to that extent it is true that the ratio is tilted towards high income bracket household but then this category of household is also saving some of its income and investing too. And when they invest, employment is generated and people are lifted out of the poverty.
It’s important to note that during the last three years, the growth rate has been on an upward spiral and if the trend continues, employment opportunities will expand and poverty will reduce. Yet we are highly impatient and want results overnight. Actually it will take quite a few years of sustained economic growth before we see a reduction in poverty.
A conversation with Dr. Ishrat Hussain
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