Daily Times

In recent months, Mr Dar has succeeded in bringing the price of the dollar down to below the Rs 100 level after letting it slip to Rs 110. This feat was achieved by a benevolent influx of $ 1.5 billion from a ‘friendly’ country. Pakistan is about to launch a two billion dollar Eurobond this month, which will further strengthen the rupee. However, despite these measures, the long-term outlook on the rupee cannot be bullish because of the government’s inability to tackle fundamental economic issues and make tough fiscal choices. In fact, the overall direction of the economic policy is likely to lead to troubling consequences in the times ahead.
So why am I not bullish over the rupee? For one, despite the recent strengthening of the rupee, it is still at the same level (Rs 98 per dollar) at which it was when Mr Dar took over. The influx of $ 1.5 billion only covered the current account deficit, which ballooned in the second half of 2013 to $ 1.58 billion. The forex reserves stand at around $ 10 billion (or approximately 10 weeks of imports) against a peak of around $ 17 billion in 2012-2013.
More so, the issue of the Eurobond or influx of friendly money is merely a short-term arrangement whose effect will fade if underlying fundamentals are not fixed, and there seems no will on the part of the Sharif government to fix the fundamentals. Pakistan’s weak currency is the direct result of a sustained trade deficit. Throughout our history, our exports have been less than our imports and unless this basic gap is filled, the Pakistani rupee will keep depreciating against major currencies.
The trade deficit as percentage of the GDP has been pretty stable for the last two decades and thus has led to a stable average fall in the rupee’s value of around five percent per annum since the liberalisation of the forex markets. The causality between the decline in the rupee’s value and the trade deficit is so profound that any other measures to shore up the current account prove insufficient (thus my assertion that Daronomics will fail too). For example, Musharraf tried to keep the rupee stable through measures like foreign aid influx. There was also an influx of foreign investment in the Musharraf era, thanks to cheaper credit available in the global markets. However, when these measures ran their course, the dollar jumped from Rs 60 to Rs 85 instantaneously. Interestingly, this 25 rupee increase over a period of seven years amounts to 5.1 percent year over year (YoY) increase, just the same as is the annual average decline. So without the Musharraf measures, we would have a fall of five percent to six percent per annum gradually; with Musharraf’s measures we had to have an equalised fall of 42 percent at once.
The only proven method of increasing the real wealth of a nation is productivity-led exports and Pakistan too cannot do it any other way. The only cure for a weakening rupee can be increasing exports. Any measures Mr Dar takes to artificially boost the rupee will fail if this root cause is not addressed. So, unless Mr Dar does something to reduce the trade deficit by increasing exports, one has to be bearish on the Pak rupee.
And that takes us to the multi-billion dollar question of how to boost exports. For one, protectionism, for which the PML-N is famous, will not do. Protectionism for stable industries ends up making industries even less competitive. We have been protecting industries like automobiles for too long, with a net negative impact on the economy. Controls on import of cotton and yarn were protectionist measures to facilitate the textile and garments industry. When the government lifted those controls in 2008, the net impact on exports, GDP and distribution of wealth was positive.
The only way to have a sustained export surplus is through sustainable competitiveness. Sustainable competitiveness is a function of innovation and enhanced productivity. This can only be achieved through education system reform, democratisation of credit and capital markets, higher labour participation rate, rule of law and lesser intervention of government in economic planning. For now these seem to be off the Sharif government’s to-do list.
As if this inaction were not enough, the Sharif government is preponing the tax collection (property tax, automobile tax, etc.). At the same time, they are encouraging tax evasion with policies like no audit of tax returns, tax amnesty schemes and extension of tax filing deadlines. This leaves little room for prudent fiscal policy in the years ahead and takes away any ammunition the government will need to tackle economic jitters in the times ahead.
The game plan of the government seems simple: bide time with short-term measures and hope to keep the ball rolling till the term expires. Keep pleasing the trader/industrialist constituency with tax relief and avoid tough economic decisions. This policy is dangerous for the country and for the government. However, as with other affairs, in economics too, living on the edge is the mantra of the current Sharif government. Daronomics, in its current form, is bound to fail. Mr Dar hopes that the ‘friendly’ regime keeps delaying this failure till the end of the term.

The writer is a freelance columnist and may be contacted at aalimalik@gmail.com