Foreign Currency Accounts Freeze 1998*<br />Presented by:<br />SaadSarfraz<br />
Agenda<br />Review the history of Foreign Currency Accounts in Pakistan<br />Review the events that led to the Foreign Cur...
History  of FCD in Pakistan<br />Introduction in 1975<br />Reason for Dollarization<br /><ul><li>Forward Cover By SPB to C...
Highly Liquid Investments
Erosion of Confidence
Deficit Financing
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 11,199...
Events in May 1998<br />Nuclear explosion<br />Decline in investor confidence<br />Sanctions by USA<br />Suspension of aid...
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 mil...
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Foreign Currency Accounts Freeze 1998

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Foreign Currency Accounts Freeze 1998

  1. 1. Foreign Currency Accounts Freeze 1998*<br />Presented by:<br />SaadSarfraz<br />
  2. 2. 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 />
  3. 3. History of FCD in Pakistan<br />Introduction in 1975<br />Reason for Dollarization<br /><ul><li>Forward Cover By SPB to Commercial Banks
  4. 4. Highly Liquid Investments
  5. 5. Erosion of Confidence
  6. 6. Deficit Financing
  7. 7. 1947 Foreign Exchange Regulation Act and SRO 1972
  8. 8. 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‘…the past experience had shown that in a period of uncertainty foreign currency deposits begin to be withdrawn and it was apprehended that it could take place on a large scale and sustained basis in the post May 28 period.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 />
  9. 9. Events in May 1998<br />Nuclear explosion<br />Decline in investor confidence<br />Sanctions by USA<br />Suspension of aid<br />
  10. 10. The Freeze<br />Official reasoning<br />Confidence crisis<br />
  11. 11. 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 />
  12. 12. 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 />
  13. 13. 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 />
  14. 14. 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
  15. 15. Destruction of investor confidence
  16. 16. Stock market crash
  17. 17. 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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