Devaluation and Trade Dispute: Pak Economy in Doldrums. By Farooq Ganderbali


The Pakistani rupee plunged to about 115.5 per dollar in early trading from 110.5, marking an unacknowledged but a sudden, quiet and sharp devaluation of the Rupee on March 20.
Last year, it suffered the greatest devaluation witnessed in the last 10 years. On July 5 2017, the rupee fell 3.1 per cent to 108.1 against the dollar, the lowest level since December 2013.
The IMF (International Monetary Fund) has predicted that the Pakistani rupee would be overvalued by about 20 percent.
This underscores the woes of Pakistan’s economy that is moving from one crisis to another, with none to head its finance ministry at home and none abroad willing to bail it out.
Imagine the country’s finance minister Ishaq Dar being on the run and an economist-bureaucrat, Miftah Ismail, advisor to the prime minister, running the all-important ministry. Things couldn’t be worst with all economic indicators moving south.
As Pakistan hurtles towards a chaotic election with the army and the judiciary combining to do their worst to keep out the ousted prime minister Nawaz Sharif, the biggest victim is the economy, already stretched beyond limits.
Its officials and non-official analysts, both take shelter under the prevailing political uncertainty in the run-up to a general election as an important factor in the management of the rupee and the economy.
Like any good finance minister (as the official holding the baby in this case), Mr. Ismail has expectedly called the depreciation as “good for the economy.” But any sober view, within or outside Pakistan does not share this optimism.
Interestingly, but not without surprise, little is available by way of analysis of the economic conditions. Even media editorials have taken to bashing Nawaz and Dar for misleading the people for four years by insisting that the economy was in good shape – which in a limited way, actually, it was. Like most South Asians, Pakistanis understand little of economics – the homemakers are wiser since they bear the brunt.
The government has not explained as to how much closer the rupee valuation now is to its value if allowed to be freely determined by the market. In the current mood, none is prepared to believe Ismail who has tweeted that the “current devaluation is a good thing”. He has painted a somewhat rosy picture that a pick-up in exports and a slowdown in the rate of growth of imports in February are positive trends.
If the February trade figures, a 16.5pc reduction in the trade deficit over January 2018, do go on to become a trend and pressure on the external accounts abates, perhaps Mr Ismail will be vindicated. But all that remains in the realm of hope and speculation.
It is truly a grim situation in that the army, already in control of the country’s diplomacy vis a vis India, the US, Afghanistan, the nuclear arsenal and much more, must now look at the economy. The adverse comments of the army chief, Gen Qamar Bajwa, on the civilian economic stewardship indicate a new element in the civil-military relationship.
There is some truth on both sides of the civil-military divide on the economy and the role of institutions, but in the given situation, a collapse in civil-military relations could itself become the biggest threat to the economy and the state’s finances.
The jolt to the rupee was the latest indicator that the triple threat to the economy remains the external account; the budget deficit, especially circular debt in the power sector and failing, debt-ridden state-owned enterprises; and the wait for China-led imports to deliver economic growth and job creation, as the government has claimed it will.
Take just one indicator of Pakistan’s economy to get at least a regional perspective, if not a larger one: the foreign direct investment flowing into Pakistan was less 1pc of its GDP, lower than other regional countries like India and Bangladesh and required to be raised to at least 3pc of GDP.
Released earlier this month, the first post-programme monitoring IMF Staff Mission Report has confirmed the poor quality of economic policies and financial management. It laments that if there were any gains in stabilization of Pakistan’s economy during the tenure of the IMF programme, they were largely illusory in character, facilitated by creative accounting, one-off transactions and by the substantial decline in international price of oil.
The most significant areas of deep concern have been (a) the complete lack of focus on addressing the decline in exports; (b) excessive external borrowings to artificially build up foreign exchange reserves; (c) a continuing narrow tax base; (d) weak and faulty debt management; (e) failure to check the steady accumulation in losses of public sector enterprises (PSEs); and (f) the rise in circular debt in the power sector to almost one trillion (growing by almost Rs 550 billion during the tenure of this government), without accounting for the growing circular debt in the gas sector.
The tenor of the report is clearly very negative and pessimistic about the future prospects for the economy up to 2022-23. Indicators of the downside nature of the projections are as follows:
(i) As of last month, the report makes a startling disclosure that net international reserves have already become negative, as compared to a positive $7.5 billion in September. This is the first indication that gross reserves have already reached an unsustainably low level and the country will face a serious challenge in the medium term to service its external debt and other obligations.
(ii) The report projects that gross foreign exchange reserves will fall from $16.1 billion to $12.1 billion by the end of 2017-18. In fact, reserves are down already to this level as of early this month, with four months of the year still to go, underlining the danger that they could fall further.
The report does highlight that if the external financing requirements for the remainder of the year are not realised, gross foreign exchange reserves could fall to $9.4 billion by the end of 2017-18, barely 50 per cent of the benchmark for sustainability of four months cover.
If the shortfall persists, reserves could be as low as $7.1 billion by end-June 2023. This level would not even be adequate to provide import cover of one month. As such, there is the imminent risk that the year 2018-19 could witness the onset of a severe financial downturn.
The extremely worrying finding of the IMF Staff Report is that even with relatively optimistic projections beyond 2017-18, Pakistan will still find itself in a highly challenging position, with reserves projected at only $10.4 billion by the end of 2018-19 and only $9.5 billion a year later.
The optimistic nature of the balance of payment projections is underscored by, first, low growth rate of imports of five per cent in 2018-19 despite the peaking of CPEC machinery imports and the prospect of higher oil prices.
A serious outcome of this report is that with it being published, Pakistan’s access to international capital markets (the maturity periods of potential commercial borrowings or rollover of swaps will get shorter and the terms and interest rates more stringent) and to concessional financing from multilaterals and bilaterals will be greatly diminished.
All this adds to the grim prospects thrown up the FATF that has placed Pakistan on the grey list with it likely to be placed on the black list in June for failing to take action against money laundering and funding of terror outfits that have been proscribed by the United Nations, the US and many international financial bodies.
Next, Pakistan has become abjectly dependent upon the (CPEC). But a top foreign business representative cautions against it.
“CPEC is a loan and Pakistan is using it for infrastructure and its energy issues. This is something that is (also) misunderstood abroad, that China is somehow giving money to Pakistan. It isn’t the case”, says Bruno Olierhoekhe president of the Overseas Investors Chamber of Commerce and Industry (OICCI) that represents nearly 200 foreign companies operating in Pakistan.
The CPEC is anything but a two-way traffic as China is merely bringing in goods and funds and finds little to pick up from Pakistan by way of exports. Empty containers returning to China don’t make sense what is deemed to be a bilateral process with promise to become multilateral.
It is now clear that the US dollar may be replaced by Chinese yuan in China-Pakistan trade. Pakistan's then Minister for Planning and Development Ahsan Iqbal, now the Interior Minister, has said.
Critics say this will dovetail Pakistan’s economy with that of China, making the former heavily dependent upon the latter.

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