Agenda<br />Review the history of Foreign Currency Accounts in Pakistan<br />Review the events that led to the Foreign Currency Accounts Freeze<br />Analyze the economic implications of the event <br />Make recommendations for future<br />
History of FCD in Pakistan<br />Introduction in 1975<br />Reason for Dollarization<br /><ul><li>Forward Cover By SPB to Commercial Banks
1947 Foreign Exchange Regulation Act and SRO 1972
Protection of Economic Reforms Act (1992)</li></li></ul><li>Historical Events in 1998<br />Indian Nuclear Tests May 11,1998<br />Pakistan Nuclear Tests May28,1998<br />Foreign Currency Accounts Freeze April1,1998<br />Statement by the Government<br />‘…the past experience had shown that in a period of uncertainty foreign currency deposits begin to be withdrawn and it was apprehended that it could take place on a large scale and sustained basis in the post May 28 period.<br />Sartaj Aziz,(Finance Minister of Pakistan,1998) “Why foreign currency accounts were frozen?”, Dawn, August 5, 1998.<br />
Events in May 1998<br />Nuclear explosion<br />Decline in investor confidence<br />Sanctions by USA<br />Suspension of aid<br />
The Freeze<br />Official reasoning<br />Confidence crisis<br />
Consequences of the Freeze<br />Stock market down by 37.6%<br />Rupee depreciated by 16.2%<br />FOREX reserves at $423 million<br />Low credit rating<br />
Failure of the Banking System<br />Depositors lost Rs. 100 billion<br />Failure of SBP and the government<br />Loss of $2.5 billion in government reserves<br />
A case in point<br />Exchange rate depreciation leads to capital inflows<br />Increased share of foreign assets in portfolio<br />Effect of substantial foreign-currency denominated asset<br />An important channel for FOREX accumulation is blocked<br />
Conclusion<br />The FE position of Pakistan was overestimated by the inclusion of the FCAs in the FE reserves.<br />The Freezing of Accounts led to:<br /><ul><li>Currency depreciation
The freezing of the accts should not be repeated again in the future no matter how dire the situation may be </li></li></ul><li>Recommendations <br />The govt. should maintain the balance of trade so it would always have enough foreign reserves to avoid foreign currency constraints in the future.<br />A check should be kept as regards the FCAs held by local people to avoid dollarization of the economy.<br />The black market for FE should be uprooted through strict legislation to avoid capital outflows.<br />
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