The Pakistani Rupee has been on a downward slope for almost 3 years now and needless to say that not only is this tangibly eroding connectivity of an average Pakistani with the outside world, it is also at the same time very punishing for the common man economically. Pakistan’s economic system—at least in theory—works on market principles, is compliant with WTO trading rules and regulations that call for an open economy for imports and is subject to a number of trade agreements that are predominantly politically driven, and therefore it comes as no surprise that imports are relatively inelastic and high as a percent of GDP, and that any devaluation of the Pak Rupee automatically correlates to higher inflation.
The author has been consistently writing about inflation and market economies where time and again it has been pointed out that one of the main problems with the market economy system is that developing or poor countries have to be extra watchful on not only the extent, but also the content of product inflows they allow in. It is important to remember that while the goods are being sourced at global market rates, the cost will ultimately be borne by the consumer, who to be able to afford, needs to earn almost 170, 225 and 200 times the comparable American, British or the European, respectively! However, since the damage has been done now, to address the situation, the challenge lies in successfully managing the situation with some long-term vision, empathy and prudence; sadly elements currently lacking in our economic management.
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While surely agreed that pledged compliance with WTO and the international community become a constraint in independent policymaking, but then China and India have consistently managed these aspects whenever they have felt the need to do so. And even for the champions of the so-called laissez-faire, the Americans, only recently we saw Trump literally bin almost all regulations on free trade and climate change when it suited them! In hindsight, now when we see the purpose of Darnomics where the then Finance Minister was fixated with resisting devaluation, perhaps he stands somewhat vindicated in many ways. Only if he had shown the same resilience in controlling unnecessary imports, promoting productivity and undertaking domestic-growth oriented policies to check deindustrialisation, things would have been significantly different today.
Time and again this author has argued that contrary to the general belief, devaluation drives do scant little in sustainably promoting exports. Gains if any are mostly short-term and those too more in quantum than in value terms. Additionally, in the case of Pakistan from where exports are on average low in value, a devaluation only results in further under-selling the product from its real value and in the process simply diminishing the output labor productivity in international terms. Pick up any great export story of the world, Japan, South Korea, Thailand, Malaysia, Vietnam, Indonesia, China and now Bangladesh and one sees that the success in exports has come around through maintaining a stable currency and not due to any devaluation.
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Today the Bangladeshi Taka is twice the value of Pak Rupee and their exports are more than twice ours. Also, we often hear arguments that the natural way of restraining imports is to let the Pak Rupee slide on market principles to a level where imports automatically get priced out. Well, in our case, nothing could be further than the truth, as almost three fourths of our imports are imports are either inelastic, meaning termed as essential unless we bracket them otherwise, or are of critical-in-nature type that cannot be wished away at least for now, given the external security threats. So, really for us the only way to undo this impasse would be to go back to the drawing board and redefine the very categories of essentials, critical, raw materials, capital investment, plant and machinery, etc. For example, why do we need to set up industries that merely promote imports: like automobiles, motorcycles, electronic items, FMCG, Construction and Building materials, and others, and why do we need to facilitate services that directly add to foreign exchange outflows like: an influx of foreign airlines, un-checked access to shipping lines and escalating rates, royalties, technical fees, etc. In fact, it is ironic that even of late the government is guilty of approving initiatives that add to outflows, thereby creating pressure on the Rupee rather than releasing it: Automobile assembly plants, Amazon, Retail Food Franchises, Power Plants and Boilers based on imported coal instead of local coal, semi-finished construction materials which is merely a garb, luxury food items, good-life pharmaceuticals, the list goes. A deep dive into import consumptions and one finds that even some of our leading food companies rely as much as on nearly 40 percent of imported materials and footwear companies on an imported component number closer to 70 percent. Any notions on belling the cats robbing the state through skewed power plant agreements or strictly enforcing deletion programs or made-in-Pakistan push or on using an iron hand to stop under declaration and miss declarations in imports, all seem like a pipe dream.
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The other day one heard the finance minister blame the taxpayers on not paying enough and how he plans to go on a witch-hunt to extract more, because the government cannot meet its expenses and has to borrow, resulting in inflation and a weaker Rupee. Well, he has me confused, because the pace of yearly increase in government expenditure by far exceeds the annual pace of tax collection, which by the way has been posting a double digit growth since 2013. Trust he really needs to look at first putting his own house in order by not only restraining state’s expenses, but also unleashing schemes for generating revenues from the State Enterprises at his disposal. Without going into a comparative analysis of what smart country managers around the world achieve from tapping state investments, all he has to do is to arrest the losses in the institutions under his wings—a rupee saved is a rupee earned. Also, a study of economic history will tell him that if the spending is right, meaning it adds to growth, development, employment generation and equitable distribution of wealth, governments rarely worry about domestic borrowings—prime examples, US, UK, China, India and now the EU as a block. The trouble comes when the economic managers fail to successfully use the tools at their disposal to control the external account. For anyone interested in reading the charter of the Fed Chairman, the principal responsibility is stated as defending the value of the USD. No real secret then, post Bretton-Woods the real battle is not about the number of tanks or fighter jets a country possess, but about the strength of a nation’s currency.
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