Shehryar Aziz |
Analysing the views of the members of the government’s Economic Advisory Council (EAC), one notice, that they are not in favour of having a “strong rupee”, and that they do not share libertarian values. Their support for the imposition of regulatory duties to curb imports indicates that the chances of government using its reserves to artificially strengthen the rupee are slim.
And given the position of the State Bank of Pakistan (SBP)’s foreign-exchange reserves, it will be quite challenging to do so. As of yet, there is no deal between the International Monetary Fund (IMF) and the government. But when a deal does get finalised, one expectation is that the government will continue with its policy of maintaining a floating exchange rate.
Euphemistically speaking, our “guns vs butter” ratio is not only dysfunctional but also growing more worrisome by the day.
While in the near term, a further depreciation of rupee is expected, it would have more to do with the fundamentals of the economy rather than the IMF. On the current government’s strategy on exports apropos devaluation, I think, the government’s economic team still continues to operate in a fire-fighting mode. Their preoccupation with curbing imports has obscured any export-promotion strategising.
One has to give it to the government that they have made some headway in reducing the current account deficit. It comes as no surprise that devaluation has not improved exports. While it does make our exports cheaper abroad, it also raises the cost of imported raw materials, thereby damaging the profitability and price competitiveness of exports. The problem with Pakistan’s exports is their lack of competitiveness (of which price is just one aspect).
Nearly 60 percent of the country’s exports are in one product category textiles. Pakistan has fared poorly in becoming a part of any Global Value Chains (GVCs). There is little value addition in our exports. Whereas other nations have shifted towards producing high-profit margin ICT and other high-tech goods, our focus still remains on producing low value-added commodities. One reason for this concentration in our export basket is a flawed line of thinking on the part of the government.
When a deal does get finalised, one expectation is that the government will continue with its policy of maintaining a floating exchange rate.
Since the country’s major export receipts come from five sectors, the government focuses all its export promotion incentives on these five sectors alone. If Germany had spent all its finances and energies on its western part on the premise that it drives its economy, would they ever have achieved a prosperous eastern half, post-unification? Moving on, out of its four neighbouring countries, Pakistan maintains strayed trade elations with three.
We have no intention of tapping our regional markets, however, we expect to capture exports share in far-off countries. Better trade relations with India, Iran, and Afghanistan must be established, in order to move up the trade ladder. It is high time that the government should take a stand to the powerful automobile and textile lobbies and focuses its attention equally to other sectors of the economy too.
On the subject of currency devaluing when we have countries lining up to commit money to Pakistan, I think, one needs to look at the fundamental indicators of the economy. From 3.8 percent last year, the Consumer Price Index (CPI) inflation has clocked in at 8.2 percent in February 2019 (year-on-year basis). Gas utility companies have sought a 145 percent hike in gas tariffs and the Oil and Gas Regulatory Authority (Ogra) has recommended an increase of Rs11.91 in petrol prices, Rs11.17 in high-speed diesel, and Rs6.49 in light diesel.
One reason for this concentration in our export basket is a flawed line of thinking on the part of the government.
If granted, this would soon translate into higher electricity tariffs as well. This goes to say that the future of input costs is not any promising. Second, while the current account deficit is shrinking, the growing fiscal deficit is off-setting its gains. Euphemistically speaking, our “guns vs butter” ratio is not only dysfunctional but also growing more worrisome by the day.
Couple this with the fact that revenue collection targets are being missed and the present government has borrowed Rs3.3 trillion from the SBP from July 2018-March 2019. The present value of any business entity or a country is a function of its future expected cash flows. And with the public-sector development expenditures being curtailed, and a discount rate of 10.75 percent translating into a double-digit borrowing rate for industrialists, the economy is not exactly gearing up for growth, anytime soon in the future.
The author is an analyst associated with the Policy Research Institute of Market Economy, Islamabad. He also contributes articles on economic governance for The Express Tribune and The News International.