M Ziauddin

It is very hard to fathom any economic logic in keeping the rupee over-valued other than rendering relatively less burdensome hard currency loan repayments in rupee terms.

And it is even more difficult to comprehend why our successive governments have consistently failed to understand that by keeping the rupee over-valued you are only subsidizing imports that invariably balloon the trade deficit forcing Pakistan to borrow ever more to fund the expanding deficit that perhaps would not have occurred in the first place had the rupee remained linked to its true value.

Perhaps with the attention of the Finance Minister riveted to the immediate concerns of the Panama Papers and the absence of a politically savvy permanent head of the regulator, the non-political economists sitting in the State Bank of Pakistan did what the economic logic was dictating them to do on that particular Wednesday – they allowed the rupee to plunge by 3.1 percent in the opening hours of interbank trade on July 5.

By midday the dollar had risen to Rs108.50 before settling at Rs108.25 by close. This was the largest single drop in the currency in nine years, according to Bloomberg, and as the day progressed there was no clarity on how far it might go in the days ahead.

But the rupee plunge – as dramatic as it was – stood for just one day. By July 6, it was trading at a more ‘acceptable’ Rs105.7 to the US dollar. This had happened only after the country’s finance minister called an emergency meeting, discussed the situation and then met some more officials on the day to stage-manage the recovery. The rupee strengthened 2.35%, or Rs2.54, and traded at Rs105.70 to the US dollar in the inter-bank market on Thursday. And to ensure that his ‘desire’ would prevail no matter what the economic logic dictated the finance minister appointed a retired civil servant (essentially a generalist and politically savvy) to head the SBP.

Independent economists and global lending agencies believe the rupee has remained overvalued for nearly a decade. This, they said, has hurt Pakistan’s exports, which have become more expensive, and also resulted in greater imports that have become relatively cheaper due to the strong currency resulting ultimately in widening of trade and current account deficits.

The one rule of thumb that is normally employed to determine the rough real strength of a country’s currency is to adjust it in accordance with the difference between the domestic rate of inflation which is estimated to be 5.5 per cent currently and the average rate of inflation in the countries (about 2 per cent) the currencies of which are used in the basket for calculating the rupee parity.

The difference between the two rates (5.5%-2%) comes to about 3.5% and adjusting for the usual errors in estimation and calculations, the SBP economists on that historic Wednesday reached the economically logical conclusion that the rupee needed to be devalued by about 3.1%. Thus, the rupee plunged to Rs 108.

There are many reasons for the trade deficit to widen to a record $30 billion in the first 11 months of the last fiscal year. One of them is an overvalued rupee.

The fresh statistics showing such a huge gap between earning and expenditure in the foreign trade sector have deepened concerns about long-term sustainability of the external sector, which the government is maintaining by borrowing from foreign countries and commercial banks.

Cheap imports have started hurting the import-substitution industries, according to experts. A strong rupee against the US dollar has made the imports cheaper.

Owing to the swelling trade deficit, the balance of payments of the country is now projected to worsen to levels never anticipated by the finance ministry. In its budget documents, the ministry has now revised the current account deficit projection to $8.4 billion for the last fiscal year, which again appears to be at the lower end. The actual C/A deficit number is said to be over $10 billion.

Independent economists say the ballooning of trade deficit has finally exposed vulnerabilities of Pakistan’s economy as financing such a huge gap in the midst of slowing foreign remittances and low foreign direct investment has become a challenge for the government.

Exports are not picking up despite the offer of two incentive packages to the exporters. However, these packages have remained partially funded, causing resentment among exporters.

There is a consensus among independent economists that exports must be at least 10% of GDP for sustainability of the country’s external sector.

Pakistan’s exports are plummeting not only because of a overvalued rupee or little or no demand for our raw commodities and low value-added products, this slide owes its existence to the fact that we lack enough exportable surpluses in items which are in demand globally and/or regionally. In fact, we don’t make such items at all. And minus China we have next to negligible trade relations with regional countries.

Our border trade with our immediate neighbours – India, Afghanistan and Iran – has been held hostage since the very day Pakistan came into being to our self-destructive geostrategic compulsions. So much so that we have actually cut the nose to spite the face as we have virtually bottled up the country shutting down our trade outlets in the East, in the West and North-West while the Northern outlet is too far away and in the South we have a small little sea outlet, not enough for even our own limited export and import activity.

So what do we do now? Continue living with such a depressing scenario and suffer the imminent consequences or try looking for ways to break the shackles of the model in vogue?

It is, indeed, time to do some candid appraisal of the ground realities. We don’t have our own sources of energy; we do not own enough capital to provide even two square meals to our galloping population; and being too far behind in world ranking in education, our capacity to acquire knowledge-based technologies is too limited. Much of our so-called natural wealth, like the huge coal deposits in Sindh and rich minerals in Balochistan are buried deep under mounds of earth. We don’t have either the capital or the technology to extract these on our own.

One way of overcoming these shortcomings is to go around the world with a hat in hand. This we have been doing since independence, but have done nothing with all the dole received so far, other than to create false affluence. More of the same is not going to make us behave differently. The other way of extricating ourselves from this impossible situation is to emulate the economic models that were adopted by countries like the Asian Tigers, China or even India to come out of their appalling poverty. This would need a lot of belt tightening and that too for at least a quarter of a century. This is impossible to do for a nation raised on dole all these years.

Pakistan’s economy has always remained dole-driven and import-based. Dole-driven because our big businesses, landed aristocracy and professionals have consistently refused to pay taxes on their incomes, making it next to impossible for successive governments to balance the budget without internal and external borrowings.

Most of the time foreign loans are obtained at highly concessional rates and at times, as outright grants but with conditions so framed as to make the recipient return to the donor at least 99 cents from every aid-dollar received. And the economy is overwhelmingly import-based because our manufacturers continue to feel more comfortable in low-value added exports. The burgeoning gap between flagging export proceeds and steeply rising import payments is also covered with foreign dole.

The swelling dole, which is actually debt with strings attached, further worsens the balance of payments position because of the soaring burden of debt repayment on the budget, forcing successive governments to incur ever more condition-ridden debt.

Let us now take a look at our comparative advantages: 1) We are an agricultural country; 2) We are a market of about 200 million people; 3) Pakistan is located at the crossings of trade routes from Casablanca in Africa to Kashgar in West China’s Xinjiang Uyghur autonomous region and from Thailand in Southeast Asia to Turkey beyond the Middle East; 4) China and Pakistan are all set to build a 3,000-kilometre economic corridor connecting Kashgar in China to the southwestern Pakistani port of Gwadar with road and rail. And one cannot also rule out the possibility – in a couple of years – of overland transit trade route through Pakistan linking India with Afghanistan and beyond to Central Asia.

These advantages can be exploited to the maximum if we become a warehouse/trans-shipment economy rather than continue to hanker for an industrial economy, which we have been trying all these 70 years to achieve but without any success.

This new model would require a well-thought-out trade policy that would allow almost free-of-duty entry of raw materials, intermediaries and equipment in knockdown condition to be warehoused in Pakistan and then forwarded to final destinations after the required value addition. Such a regime would also require letting the rupee appreciate/depreciate on its own without any artificial crutches.

Such a policy would also attract foreign direct investment in avenues in which it would be more economical for the sponsors to fabricate items inside Pakistan for local consumption and also to re-export them to the four-corners from the ‘hub’. This will also facilitate the transfer of technology and training of skilled manpower. Transfer of appropriate technologies would also open the way for Pakistan from being an agricultural country to becoming a leading high quality processed-food exporter.