These days, the common Pakistani is quite confused about the country’s economy. Blamed by international institutions for fudging its own economic figures, Pakistan finds itself in an increasingly volatile environment. Continuous speculation has added fuel to the fire, especially when seen in the backdrop of Pakistan’s political environment. The government’s stance remains shaky, and its conduct has been dubious in both the political and economic spheres. Recently, it devalued the Rupee for the second time in the last three months. The accumulative devaluation now amounts to 9.5 percent, implying a $7.6 billion increase in loans — all without borrowing a cent. And to top all this, the rupee’s ordeal is not over just yet, there is likely to be another devaluation before June 18.
Historically, the Rupee has been devalued by over 2100 percent over the last 70 years. This most recent sequence of devaluations started in July 2017, when 3 percent depreciation was termed the worse fall in 9 years. There was a blame game between then Finance Minister (FM) Ishaq Dar, the State Bank of Pakistan (SBP) and the market stake holders. The mighty Dar called the depreciation mind boggling and artificial and reversed it. Moreover, the SBP governor also lost his job.
However, the reality is that the International Monetary Fund (IMF) had declared that the Rupee was overvalued by 20 percent in 2016. It had also warned that this high value was hurting exports. This international financial monster now opines that artificial maintenance of stable exchange rate coupled with mounting external pressure has led to loss of international reserves, thus leaving currency depreciation as the best available option for Pakistan. Whatever the economic environment, factors or reasons for this twin rupee devaluation over the last three months; it is a vivid reflection of the country’s weak economy, indicative through the signs of rapidly depleting foreign exchange reserves, widening current account and trade deficits and inflationary pressure, as well as the destructive impact it has had on this country’s impoverished masses. The Federal Bureau of Revenue (FBR) may be the only beneficiary of this depreciation since half of its revenues are collected at the import stage, like withholding and sales tax along with custom and regulatory duties.
What is the real economic situation? Is the existing imbalance between imports and exports the only factor behind the Rupee’s recent dip? Is this downward trend regulated by design or is it running by default? Is there any economic strategy in practice? And if so, who is executing this strategy? Is it the ongoing political chaos which has hit the economy? Perhaps it is a combination of international dynamics and domestic economic mismanagement, based on artificial and short-term measures rather than an institutional approach which has led to this domestic economic fiasco.
Meanwhile, the US-China currency war has continued to intensify over the last 8 to 10 months. Both countries are attempting to increase their exports through currency depreciation. The overriding concept here, is to make goods cheaper rather than better. Dollar is continuously weakening against the world’s other major currencies, and ironically, this pattern is being followed by the rupee as well. China announced additional tariffs on 106 US goods just a couple of days back. It implies that the trade war is continuing, while fragile economies like Pakistan risk taking collateral damage.
Whatever the economic environment, factors or reasons for this twin rupee devaluation over the last three months; it is a vivid reflection of the country’s weak economy
On the domestic economic front, whatever growth rates the government claims to have achieved, the economy is showing visible signs of vulnerability. The reality is that our foreign exchange reserves have now lowered to $11.6billion, down by almost $3billion over just the last three months. This rapid depletion is still ongoing. The government is calling devaluation the best tool to handle this situation without giving an alternate option, if any. In terms of additional borrowing, the government borrowed $2.5 billion from the global bond market on November 17 and $1 billion as commercial loans from a Chinese bank a month ago. In the 2016-17 fiscal year, Pakistan crossed the figure of $10 billion additional borrowing for the first time in it 70 year long history. The PML-N government is set to break its own record, and cross $12 billion additional borrowing in the 2017-18 financial year. Prime Minister (PM) Shahid Khaqan Abbasi is visiting China next week, planning to request for the largest chunk of the $3 billion needed before June 2018 to finance previous loans. By June 2018, external liabilities, which now stand at just below $90billion, are likely to cross $100 billion with the current account deficit at$16 billion. External financing needs will shoot up from 7 to 9 percent of the GDP.
With the budget 2018-19 likely to be announced by end of this month and 60 days left in the tenure of the incumbent government — the question remains — what can be done? Peculiar to our economy, factors which are likely to drive the Rupee in the foreseeable future include the geo-political situation, domestic environment, interest rates, trade, growth rate and inflation. Pakistan desperately needed structural reforms in energy, public sector and taxation which never materialised over the last five years. There are no quick-fix solutions now, but the import bill has to be controlled through operative regulatory duties and other administrative measures. Effective but immediate regulatory steps are needed to plug the ‘hawala’ route. Growing deficiency in the balance of payment has to be stopped. The government must seriously attempt to contain the fiscal and current account deficit. Is there anyone in the PML-N who can tell Mian Nawaz Sharif and Maryam Nawaz to please take a break from mudslinging on state institutions, and focus on this vital issue?
The writer is a PhD scholar with diverse experience and international exposure. He possesses conscious knowledge about the phenomenon of terrorism and extremism coupled with realistic understanding of geo political, social and security environment
Published in Daily Times, April 10th 2018.