File photo of Finance Minister Ishaq Dar courtesy PID
Finance Minister Ishaq Dar set off alarms bells over the weekend after telling Geo News that the foreign exchange reserves held by the country were $10 billion rather than $4 billion, due to the $6 billion held by commercial banks’ customers.
In an interview with the private broadcaster, he said the reserves held by commercial banks also belonged to the state, seemingly in an attempt to reduce public concerns over the country now having funds sufficient to cover barely a month of imports. However, the result was the exact opposite on social media, as it triggered panic among the general public, which is already finding it difficult to buy dollars and open letters of credit for imports.
To be clear, the government doesn’t have any ownership over foreign exchange held by commercial banks. Any statement suggesting otherwise can prompt worried depositors to seek mass withdrawals, which risks further instability. According to economic experts, Dar’s statement risks encouraging dollar hoarding and flight, as people might worry about the state seizing their assets—an unlikely prospect, but one that is borne out by history, especially that of the ruling Pakistan Muslim League (Nawaz).
In 1998, when Pakistan was facing U.S. sanctions after testing its nuclear capability, then-prime minister Nawaz Sharif directed the State Bank of Pakistan to freeze all foreign currency accounts to deter capital flight and shore up depleting reserves. The decision had a negative impact on consumer confidence, with several foreign banks either reducing or outright ending their footprint in Pakistan as a consequence.
Shortly after the incumbent government took power last April, several rumors swirled about the ruling coalition taking similar measures to tackle the looming crisis, but these were strongly rebutted by the Finance Ministry. In a fire-fighting bid after Dar’s latest remarks, Planning Minister Ahsan Iqbal stressed that the government had no plans to touch anyone’s private funds. He also clarified that the finance minister’s remarks were “misunderstood,” as he only meant to highlight the total reserves held by both the central bank and commercial banks.
According to data of the SBP, the reserves held by it are currently $4.5 billion, barely enough to cover a month of imports. All eyes are now on the International Monetary Fund (IMF) and its next tranche of $1.1 billion in an ongoing bailout, which observers claim is necessary to attract additional support from “friendly” nations.