Pakistan’s Foreign Reserve Crisis & Gold Reserves As A Solution

Pakistan is facing a balance of payment deficit where the country’s imports are exceeding its exports. In other words, the number of dollars is mostly leaving the country which is draining the foreign reserves day by day.

On the other hand, Pakistan has multiple debt payments to be made which also contributes to lessening the foreign reserves even more. Pakistan had already paid $1 Billion in Sukuk Bonds and by doing so have avoided an immediate default. In addition, Pakistan had also paid back some of its IMF and other national and international loans, which to a point has now drained out its foreign reserves standing at only $7 Billion or even less.

But what is necessary to understand is that the current situation of Pakistan’s foreign reserves standing at only $7 Billion (or less) does not take into account the Gold reserves which Pakistan has as a backup.

Pakistan separately has gold reserves worth $4 Billion which is twice as much as what the IMF program had offered. Instead of IMF programs or running towards Saudi Arabia, utilizing these gold reserves is the need of the hour, either selling or investing the gold to increase foreign reserves or pledging the gold with foreign banks.

Why? Because this is how India also recovered from crisis back in 1991. India was in a similar situation where they had less than $2 Billion left in their foreign reserves but their economy recovered since they pledged gold as security with foreign banks.

Come to think of it, Pakistan’s gold reserves are just laying around doing nothing. This includes the Reko Diq as well, where multiple golds under the Reko Diq are also laying around doing nothing. Given the fact that prices of Gold are increasing day by day, it is necessary to increase our gold reserves as well as utilize them. The good news is that, recently, the provincial and federal governments had made it legal and allowed it to start its operations on Reko Diq where extraction of gold shall be beneficial.

The criticism which some economists will bring up is that gold reserves are state-owned assets and should not be sold for short-term woes and even if they were, it won’t be of many benefits as these gold reserves are not much as compared to what is really required to fulfill the foreign reserve needs.

Multiple businesses and SME’s are seemingly shutting down temporarily due to the government not being able to approve Letters of Credit (LC), only because there seem to be dollar shortages. Still, the economists and the SBP won’t consider the use of an alternative like gold for the above-mentioned reasons.

These are the same panels that will advocate for privatizing state-owned companies and will close down the government’s source of earnings by handing them over to private or foreign individuals who will mostly exploit local workers and resources, diverting large potential revenues of the state into the pockets of private elites. This is one of the reasons why the government will then be forced to increase taxes and levies on everyone since the money supply and source of earnings of the government just got privatized.

A counter-argument put forth is that privatizations are necessary as they become a liability to the state when they start to go into loss but will have no problem considering IMF loans as capital (despite the fact that it is also a huge liability) and won't have a problem paying off Rs. Trillions in interest debts. But on the flip side, will definitely have a problem with using gold as an alternative. This can likely be a contributing factor in decreasing the foreign reserves in the first place.