INSIGHT AND FORESIGHT

June 28, 2013

MY EYE YOUR EYE: PAKISTAN’S FISCAL SLIDE

Filed under: Uncategorized — sharafs @ 4:59 pm

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Since 1972, Pakistan’s currency has devalued by a walloping 892%. Of all evils that plague Pakistan’s economy, a depreciating rupee appears the mother of all. Energy prices and shortfalls have more to do with devaluation than the dollar prices of IPP energy. 900 fold depreciation means that something is not right. For far too long, Pakistan’s central bank experts, economic managers and surveys have misinformed that a weak rupee is imperative to boost exports and build foreign exchange.

Devaluation and bad economics aggravate Pakistan’s downward spiral. It has led to accumulation of foreign debt, high cost of imports, low exports, substitution of cheaper imports (consumerism), the rising cost of IPP energy, energy shortfalls, flight of capital and its reverse flow in dollars, hyperinflation, rising consumer price indices, and creation of elites making windfalls through exchange rate instability, stocks, properties and corruption. While pockets of vertical richness have climbed steeply, the poverty has spread horizontally. This has led to very low human development indices, rising populations, unplanned urbanisation, poverty and crime.

Pakistan’s economic managers trained at Harvard and Westminster lack the psychology and urgency of a Pakistani.  You cannot be a hare and run with the hounds. Year after year, they play the leach sucking blood from stones. They ceaselessly contend the mantra of a weaker currency to boosts exports. They ignore the fact that countries like EU, Japan and China through their own downward monetary adjustments force the cost of economic adjustment onto emerging countries via appreciation of rival currencies. Rather than hedge this incidental appreciation through politically crafted defensive mechanisms the Central Bank allows the rupee to float and depreciate. The cycle goes on.

But there is a silver lining with a counter narrative. Despite such massive economic mishandling, Pakistan’s unregulated economy has managed to sustain itself and acted to offset disadvantages of state controlled management. This undocumented sector evades tax collection but donates generously to social causes. The ‘Not for Profit’ organisations catering to the deprived segments of the society far outweigh the direct taxes collected by the FBR. Pakistan’s social capital is there to be exploited.

Pakistan’s monetary policies are divided into two categories. The first phase began in 1955 and ended in 1972. During this period the Rupee Dollar parity began from 3.30 and ended at 4.77, meaning a devaluation of 44.5%. The influx of US Aid through MAP led to rapid industrialisation and an export led economy as a result of which the growth surged and sustained itself between 5-6% of the GDP.  The Central Bank allowed the rupee to float while retaining its value due to exports of Jute, tea, cotton, textiles and instruments. Pakistan was a role model developing country and a pride for IBRD, Word Bank, and IMF. However, inequitable distribution of wealth, permit mafias and failure to address compulsions of domestic political economy led to a civil war and disintegration.

Separation of East Pakistan weakened the rupee that dropped to 11 and had to be readjusted through demonetisation. Till 1981 the Rupee appreciated and stabilised below 10. Despite nationalisation and Bhutto’s populism, the GDP remained stable around 4.5, a good performance in the aftermath of a great national tragedy. During the Soviet occupation of Afghanistan, Pakistan became the hub of the internationally supported Afghan resistance. Dollars and Narco-money flowed. The GDP hovered around 6-7 % while the rupee unnaturally plunged to 18.26 reflecting the failure of the government to use unexpected inward remittances as boon to domestic industry.  Oversizing of the unregulated and black economies resulted in inflation and proliferation of cartels. By 1989, when democracy returned, Pakistan was under international nuclear sanctions. Intervention of international financial institutions with financial oversight became endemic.

In the period 1989-1998 the GDP declined from 7 to just below 4%. In these ten years, the Rupee declined from 21.4 to 46.11 by 116%. This decline was mostly attributable to international sanctions and decline in power generation capacity. As per one estimate, during this period Pakistan’s unregulated economy dwarfed the official economy and held the country together with controlled inflation and domestic production-consumption cycle. Economic sanctions failed.

After the nuclear explosions in 1998, the government decided to seize foreign currency accounts in exchange for rupees. This amount of over 11 billion dollars with the private banks was seized to hedge Pakistan against additional nuclear sanctions and economic starvation. The rupee fell from 46.11 to 51.1 according to official rates but 57 as per market rates. This devaluation of 24% was to set negative trends for Pakistan’s future.

Post 1999, the Central Bank controlled the rupee dollar parity, built foreign exchange and began restoring remittance confidence. Other monetary policies were counterproductive. Post 9/11, Pakistan once again became the hub of international attention. Inward remittances surged and GDP jumped to sustain itself above 6 and peaked below 7 in 2004-5. Thereafter the decline began resulting in an all-time low below 3 in 2008, 2011 and 2012. Shaukat Aziz’ economy was a bubble he blew away when leaving.  The reason why?

After 9/11, despite $13 billion in the system and an appreciating rupee, the Central Bank devalued the national currency, making imports more expensive and multiplying foreign debt. The government ignored that in a trade deficit it must regard unexpected and non-fundamental appreciation of domestic currency as a boon for cheaper imports and resetting of import priorities. To add insult to injury, the government devalued the rupee and left 1 trillion at the mercy of the banking sector; an equivalent of Pakistan’s entire national savings from 1965 to 2002. The argument was that the central bank had run out of sterilisation capacity.

But this was a wrong decision. If the domestic private sector could not absorb the surplus money, the state could. With the increase of FCA remittances the 1 trillion windfalls should have been absorbed through government securities at market rates. Shaukat Aziz then went on to create a holier than holy state monopoly in the name of PSO no one can investigate for the trillions it has embezzled.

Pakistan hopelessly lacks a War Front on its political economy. Had it been so, the economic statisticians would have concentrated on fiscal policies rich in political thought. Pakistan needs a paradigm shift in its economic policies built around a re definition of Pakistan’s currency. The Paisa and Anna must regain its value.

So how will we look IMF in eye to eye and dictate terms? “My eye and your eye- beautiful sensational eyes” is an ironic twist. This sums up Pakistan’s predicament.

Brigadier (Retired) Samson Simon Sharaf is a political economist and a television anchorperson. Email: samson.sharaf@gmail.com

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/columns/29-Jun-2013/my-eye-your-eye

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