Posted by: Administrator | 21 August, 2008

Foreign Reserves Phenomenon: Shaukat Aziz versus PPP



Written By: Afreen Baig   shaukat-aziz

Foreign Reserves – a significant economic indicator and of vital importance to every expanding economy. Foreign Reserves is the first and basic economic indicator that transmits an air of confidence and trust, amongst the potential foreign & local investors and the nation. Foreign Reserves are held in abundance and accumulated – in order to sustain the confidence of a country’s capacity to carry out external trade confidently, to balance the momentum between demand & supply of foreign currencies, and also used as an intervention tool by the State Bank. Reserves also bail out the economy in times of financial crisis.

By October 2007, at the end of Prime Minister Shaukat Aziz’s tenure, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion. His exceptional policies kept our trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8.4 billion.

Pakistan recently has seen a drastic drop in its Reserves by 50% and its currency devalued by 40%, which has left ordinary people confused and the usual cynics have started heaping the blame onto the policies of Mr. Shaukat Aziz, without even knowing the basic macro-economic indicators nor understanding the relationship b/w Foreign reserves, Trade deficit and Currency devaluation.

The Trade deficit (Exports minus Imports) is always managed in ratio to Revenue generation, Capital inflows and Reserves. Almost all developing economies face the dread of trade deficit but their abundant foreign reserves gives them the fiscal space to overcome those grievances.

Illustrating in mathematics for ordinary readers, on October 2007, when PM Shaukat Aziz left us:

Exports – $18 billion

Imports – $30.53 billion

Trade deficit – $12.53 billion

Foreign Reserves – $16.4 billion

What is to be seen above is that, Pakistan’s Foreign Reserves $16.4 bn exceeded the trade deficit $12.53 bn by a comfortable $3.87 billion and with an additional foreign investment of $8.4 billion – Pakistan’s currency stayed stable at Rs.61 per dollar.

Currency starts to devalue ONLY when the Trade deficit surpasses the Foreign Reserves.  This rare phenomenon occurred in PPP’s incompetent & dense minded government, which has led to devaluation of the currency by 40%. They failed to protect our Sovereignty – our Foreign Reserves!

In PPP’s inept government of eight months,

Trade deficit – $20.74 billion

Foreign reserves – $8 billion

Under PPP, the Reserves fell from $14 billion to $8 billion and the trade deficit increased from $12.53 billion to $20.74 billion.

The moment the foreign reserves ($8 bn) fell below the trade deficit ($20.74 bn), the currency starts to devalue. Under Mr. Shaukat Aziz, Rupee stayed stable till October 2007, because our Reserves $16.4 billion EXCEEDED our Trade deficit of $12.53 billion.

In 2007, when international oil prices reached an alarming level of  around $90 per barrel, predicting to exceed $140 per barrel, it hurt the Imports bill of many developing countries, by increasing the trade deficit. The experienced Mr. Shaukat Aziz gauged this situation and immediately started monitoring & controlling individual sectors that were importing. He allowed imports only in sectors that were export specific. His efforts resulted in decreasing our Import bill by 6.53% by September 2007 (one month before he left).

Rupee stayed stable throughout Mr. Musharraf’s supported governments. Trade deficit never exceeded the foreign reserves in the last eight years. The results were as follows – a stable rupee:

2001-02: Rs. 61
2002-03: Rs. 57.7
2003-04: Rs. 57.92
2004-05: Rs. 59.66
2005-06: Rs. 60.16
2006-07: Rs. 60.5
2007 (Dec): Rs. 61

What did the inefficient PPP do in these last eight months? They failed to monitor each sector of imports to control them individually. Pakistan’s economy started destabilizing because PPP could not guard our $14 billion reserves. Nor did they utilize any effort to increase the reserves from where Mr. Shaukat Aziz left it at $16.4 billion! The easier way out for them is to beg around the world barefaced or go back to IMF disgracefully.

What did the PPP further do? They increased the import bill by 55% in the months April to June 2008 and again increased it by 52.65% in the months July to September 2008 – though world oil prices fell from $140 per barrel to $70 per barrel.

Flight of capital takes place ONLY in economies where there is lack of trust and faith! Investors and endowing Public do not trust the government of PPP and are wary of PPP’s earlier corrupt reputation.

In the first four months of PPP, around $22 billion were withdrawn from the economy and KSE’s market capitalization fell by $29 billion. The State Bank was forced to place ban on transfer of dollar outside Pakistan.

Foreign reserves get hurt twice in this depletion process. First, when the investors and public pull back their money. Second, when macro-economic indicators witness imbalance and the government is forced to pay their external liabilities through these Reserves. This second stage occurs only when the government loses other means of regular income and is unable to control their imports.

Every country in the world is forced to make Imports. Imports help boost Exports. Even the world exporter China makes an import worth around $954 billion, to further promote their exports. But, Imports should be Export specific – scrutinized and restrained monthly – which was being done under the policies implemented by Mr. Shaukat Aziz.

Let’s analyze the steady India, as an example, with GDP growth of 9%.

Indian Imports – $188 billion (compared to Pakistan’s imports of $40 billion)

Indian Trade deficit – $63 billion (compared to Pakistan’s deficit of $20 billion)

The Indian currency is not devaluing because their Foreign Reserves $308 billion exceed their trade deficit of $63 billion.

Had Mr. Shaukat Aziz continued, the Trade deficit would have been kept controlled in accordance with Pakistan’s Revenue generation, Capital inflows and Foreign Reserves – which would have kept our rupee stable and economy booming at 7% GDP growth.

This latest IMF tranche of $7.6 billion, pre-arranged for a period of two years, will not help boost an economy whose foreign investment is declining, and where the trade deficit exceeds the total foreign reserves. This economic deception is yet another soothing drug given to us, by our unpopular democratic government of PPP.

If Pakistan wishes to remain free from influence of IMF, there is no better option than to assert our economic sovereignty and accumulate Foreign Reserves, from help of over-seas Pakistani. Additionally, attract foreign direct investment (FDI) and public & private portfolio investment.  Regrettably, PPP lacks the credibility and the reliability to attract back that trust and confidence!


Afreen Baig is an independent analyst majoring in International Relations and Economics. She can be reached at



  1. Why wasa shaukat Aziz down played by pml-q inspite of these achievements? While shaukat Aziz did do all that, as we lived it, yet his critics feel that a consumer economy did not create jobs. That eventually led to Musharraf’s unpopularity. Why was that?

    Although you have written a very concise and a well written article for which I must compliment you.

  2. excellent analysis , keep it up sister can you please email me source of your information, i mean from where you collect this data

  3. It is now well clear that the economic shocks produced by high oil and commodity prices were of a short term nature and our economy had inherent strength to absorb these shocks. The need was to stand firm in the face of price hike onslaught. The oil price hike waves having subsided, our economy had a good chance to get back to its feet and resume its onward journey. This would have boosted domestic and foreign investors’ confidence in our economic buoyancy. Even after meeting our current account deficit liability for FY08, our foreign reserves would still have stood around $10 billion. Our rupee too would have easily absorbed a minor downward correction to stand around Rs.65 for a dollar. No IMF, no international bagging. But we should admire the temerity of our political and media managers who hated to stop short of a complete economic destruction. Having achieved that target, they are now looking for scapegoats. And who else could be the better scapegoats than their predecessors.

    Developing economies lacking in economic resources and hand-tied by international finance and trade constraints, are left with a dynamic economic option, consumption-led growth. This model aims at expanding the economy for which the poor economies have an inherent capacity. A strong banking system, growing population, a predominantly young generation ready to work and consume, a strategic location and a strong natural resource base are the necessary ingredients of a consumption-led growth model. Supported by prudent monetary and fiscal policy frameworks, this model is known to have worked wonders. Our economy has great expansionary possibilities which must be put to practical use. We should not be afraid of controlled fiscal deficits as these provide us a chance to expand economy through domestic debt expansion which in turn leads to increased government and consumer spending thereby setting the economic wheel in motion.

    Rich and resourceful economies embark on production-led growth. Advance technology, abundant cheap skilled and semi-skilled labor (either local or migrated), cash-oversupplied economy, growing domestic and international demands all combine together to keep the industrial wheel rolling and roaring. The international markets are flooded with their competitively priced goods and their economy keeps on growing. China has been using this model with the name ‘commodity-heavy model’. Its overheated economy is now in need of a cool-down, and the Chinese economic managers are planning to shift to the “commodity-lite” model. Our economy is best suited to the consumption-led model in which the fuel to industrial growth is provided by consumer spending. Increased consumption creates demands for good . A robust banking system under a low discount-rate regime provides ample credit to the business and industry. More goods take to the market. The banking system again steps in and provides easy credit to the consumers to enable them to buy goods. With the passage of time, canvas gets expanded. Growing demand for consumer goods results in demand for industrial goods and this is the point when capital formation starts to build up. There was nothing wrong with the model, it was the unprofessional and unpatriotic behavior of our business managers and industrialists who diverted the copious flow of easy bank credit to the speculative sectors instead of using it for capital formation. Now, in the given circumstances when credit is too expensive and hard to come by, anyone talking of production-led growth model is simply toeing the party line. We are already in with the consumption-led growth model; changing the horses in mid-stream will take us nowhere.

  4. is there any indication of positive turn in economy of pakistan in ppp economic policies? and ur article is very vibrant i like to complement you

  5. […]…  […]

  6. Well done for the brilliant and succinct article Afreen Baig. PPP has messed up on so many places, its hard to know where to begin…

    Very well explained and please continue the good work

  7. This article is very well written by you and honestly I see so many articles grumbling about the current mess but non points out what went wrong. Your article explained very nicely how confidence works up for any economy. Keep writing and informing us.

  8. From Mr Shamsul Ghani

    “The need was to stand firm in the face of price hike onslaught. The oil price hike waves having subsided, our economy had a good chance to get back to its feet and resume its onward journey. This would have boosted domestic and foreign investors’ confidence in our economic buoyancy. Even after meeting our current account deficit liability for FY08, our foreign reserves would still have stood around $10 billion. Our rupee too would have easily absorbed a minor downward correction to stand around Rs.65 for a dollar. No IMF, no international bagging.”

    Your comment makes big claims but doesn’t suggest any concrete measures. What I think is that perhaps PPP could have chosen (or groomed in its ranks) better a economic manager as Finance Minister, rather than waiting so long for Ishaq Dar to return.

  9. Great article. Ca you please post the souce of these data.


  10. Dear Jawaid Ekram,
    The figures have been taken from State Bank reports and website. These have been crossed checked through various newpaper reportngs as well. For brief cross checking, you may view ‘Economic Indicators’ and sources have been given at end of each independent line.
    Thanks for writing andd we look forward to hear from you again!

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