Political economy notes
Depreciation hypothetically improves exports competitiveness. One can argue that due to other structural problems, depreciation of rupee in Pakistan may not yield the desired result of boosting exports.
‘State of economy’ of Pakistan is under discussion, yet again for all the wrong reasons. One group of analysts sees nothing wrong with economy, while the other do not see any positive output from the economic measures taken by PML-N government during last 4 years. In my opinion, there is nothing like good or bad economic policies. One can argue that there would be some losers in best of the best economic system, whereas there would be some winners in worst economic situation. The bottom line for policymakers is how to create more winners than losers.
Looking back in this context, one finds that against the benchmark of 2013, Pakistan has remarkably stabilized its economy with considerable improvement in its macroeconomic indicators. The GDP growth rate increased from 3.6 percent to 5.3 percent, the size of GDP was stretched to Rs 31.862 trillion from Rs 22.9 trillion, inflation reduced by 3 percent, tax to GDP ratio got improved from 8.8 percent to 12.5 percent, the fiscal deficit of 8.8 percent of the GDP in FY 2012-13 was recuperated to 5.3 percent by June 2017; whereas, the size of the PSDP tremendously increased from Rs 540 billion to Rs800 billion (downwards revised figure) in FY 2016/17.
The story of stability began with the $5 billion gift from Saudi Arabia back in 2013-14. It was followed by a single time earnings from the auctions of 3G-4G spectrum. Our economy also got the benefit of sporadic decrease in international oil prices for three and half years. An extended fund facility from IMF, and last but not least an inflow of CPEC early harvest related investment also helped Pakistan in attaining macro-economic stability.
This was an excellent start for economic take off. However, due to internal inertia, lack of appetite for structural reforms, political instability, and partly due to over dependence on the above mentioned external factors; economic stability could never be sustainable.
We can only claim to have more winners from an economic system if it improves the societal cohesion, for which reduction in income gap is a must
Resultantly, issues such as low tax base (FBR tax revenue nearly doubled without any significance expansion in tax base), high cost and difficulty of doing business, bleeding public sector enterprises, uninterrupted supply of energy at affordable prices, energy circular debt, un/under employment, and low investment to GDP ratio kept haunting our economic outlook.
Despite his hectic engagement in more than fifty committees that Mr Dar was chairing, he had economic front under control during first three years of PML-N government. Due to the political turmoil in 2017, he lost focus on economy. The state of limbo in ministry of finance after his indictment in NAB cases and later on his leave of absence negatively affected his economic agenda.
Amid growing twin deficit (fiscal and current account deficit) a team of new economic managers was inducted to do a lot within too little time. Fiscal deficit, in the run up to general elections when federal and provincial governments would be on spending spree, would be difficult to manage. Energy circular debt, which has exceeded than the total federal PSDP would also be a major contributor to fiscal deficit, and so would be loss making public sector enterprises. Thus there is very little that can be done by ministry of finance to control fiscal deficit in the remaining term of current government.
The focus of new finance team of Miftah Ismaeel and Rana Afzal’s seems to be on curbing current account deficit. They started with imposing regulatory duties on ‘non-essential’ imports to discourage imports. However, it was not enough so they had to deviate from Dar’s doctrine of artificially stabilising value of rupee against US dollar.
Depreciation hypothetically improves exports competitiveness. One can argue that due to other structural problems, depreciation of rupee in Pakistan may not yield the desired result of boosting exports. Senator Dar avoided currency depreciation as weak rupee against dollar results in increased import bill, and also increases Pakistan’s net debts and service charges. However, rupee’s stability depends on foreign exchange reserves.
To begin with, the reserves built in last four years were neither from foreign direct investment, nor exports. Rather it was borrowed money. State Bank kept on pumping those dollars in local market to keep the rupee stable against dollar. The whole process had a hefty price tag. The net international reserves have declined from $7.5 billion in September 2016 to negative $0.7 billion. In this situation the government wisely decided not to intervene any further and one saw a depreciation of 10 percent in the value of rupee against dollars within last three months.
This depreciation was also necessary in the context of IMF’s first Post-Programme Monitoring (PPM) Report, which projected current account deficit to increase to 4.8 percent of GDP this financial year as compared to 4.1 percent in FY 2016-17 and 1.1 percent in FY 2012/13.
In layperson terms, IMF warns that macroeconomic stability gains achieved during the 2013-17 are rapidly eroding. To cope with the twin deficit, going back to IMF in 2018 seems very likely, unless we again get some bailout from a friendly country, as was the case in 2013 when Saudi Arabia provided us US$ 5 billion.
I am optimistic, through IMF and/or through friends, next government would again achieve macro-economic stability. However, to sustain this stability, we need to create more winners than losers. This would only be possible through keeping safeguards on our growth momentum; to bring long awaited structural reforms especially around energy and PSE governance; and through deliberate efforts to reduce income gaps. The cost of income inequality and equity is no more ‘economic’. It would have very serious political implications. We can only claim to have more winners from an economic system if it improves the societal cohesion, for which reduction in income gap is a must.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.