Currently, Pakistan is facing a huge problem of external debt. Pakistan is known as one of the poor countries who greatly rely on foreign funds especially from IMF. Due to the slow growth of the economy, Pakistan is unable to fulfil the everyday needs of the nation. The underlined causes of slow growth are corruption, political instability and lack of advanced technology.
Facing such situations, dollar reserves play as a significant asset for Pakistan especially to service external payments like debts and liabilities. An ongoing increase in the reserves by non-debt creating means helps to avoid panic in the market and reduces the needs of lending additional debt for the country.
Secondly, Pakistan uses these reserves as a tool of the exchange rate and to manage the monetary policy. The domestic money market is affected by either supplying rupee currency to the market or buying it in the market against foreign currency. The adequate amount of reserves can help Pakistan to stabilize the exchange rate and the competitiveness of Pakistani exports.
These foreign reserves can help Pakistan to cope up with unseen emergencies or unexpected exogenous shocks. The open market exchange rate dynamics can influence the withdrawal of foreign currency deposits and during these times the country needs to have adequate reserve levels.