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Interest rates are high, gas is short, security concerns are rife, the global economy is slowing down, commodity prices are falling… these are the most quoted reasons by media, analysts and policy makers alike, in their attempts to explain staggering exports of the country.
One may wonder when all these issues are prevalent with most of them are hard to fix in short term, why on earth the exchange rate is not being used as an instrument to support export growth or simply to earn foreign exchange?
What is the rationale of Finance Minister for going out of the way to keep the rupee artificially appreciated? As the lost export potential is a loss of earning stable foreign exchange and loss in employment generation as well. The story does not end here as cheaper foreign currencies are making imported finished products cheaper than locally manufactured goods, hence weakening the case for import substitution. This in turn is leading to loss in employment and a drain on foreign exchange.
The numbers bear testament to the worsening situation. Exports are down by two percent in the 1HFY15 on yearly basis. GSP Plus status obtained by the country should have led to an advantageous position in exporting goods to Europe and the same should have been reflected in trade numbers.
Of course there are some indications of those benefits creeping through. Knitwear, bed wear and readymade garments have shown growth of seven percent, 13 percent and 15 percent, respectively in the first half of the current fiscal. But over all textile exports are down by one percent because of 22 percent and 10 percent fall in cotton yarn and cotton cloth exports, respectively.
One plausible reason for this decline could be higher local demand for value added textiles. But cannot be the main reason as overall textile exports have not grown. In days of falling demand, expensive local currency versus competitors is simply eroding the country’s share in global textile trade. Had the currency not appreciated in real terms, exports would have grown this year.
The tale of imports is similar – up by four percent in 1HFY15. One may wonder if falling commodity prices are affecting trade of goods most; oil is down by far more than any exporting commodity, why are imports heading north?
Import of petroleum products is down by two percent. Average quarterly petroleum imports were $3.7 billion last year when oil prices averaged $108 per barrel. This tally stood was $3.8 billion in 1QFY15 with average price of $103.3 and $3.0 billion in 2QFY15 (average oil price: $77). The fall in petroleum imports had started but the real impact should kick in with a lag of a couple of months, in the third and fourth quarters.
But some of the potential may be lost as the government is virtually passing the full impact of fall to consumers, thus inducing demand while the recovery of electricity bills is worsening and transmission losses are rising. Thus higher demand may not let the value of imports to go down as much as it could have.
While the government may lose part of its taxes and the inter-tariff differential subsidies may not decline. Policy makers should learn from other oil importing countries, who are pouncing on the opportunity to lower subsidies and raise taxes diverting the resources to social sector development. Why can we not do the same?
Well that is still debatable as lower petroleum prices and low utility bills can give some respite to the middle income group and its impact is already visible on nose diving inflation. But yet again, one may fail to comprehend the wisdom of Dar behind not letting the rupee find its real equilibrium.
Non-essential imports have surged since the Finance Minister proudly kept rupee-dollar parity close to Rs100 mark. Food imports and other imports are up 17 and 12 percent respectively in 1HFY15 and this trend may continue.
The continued policy of keeping the local currency away from its real value had been adopted by the previous government as well. According to the IMF, there has been steady appreciation of real effective exchange rates since 2008. This reflects a pro-import policy adopted by both PPP and PMLN governments as the former kept the rupee afloat even when the import cover was as thin as one month.
The appreciation has accelerated under the PMLN leadership as the nominal exchange rate has appreciated against all major currencies in 2014 – five percent against USD, 10 percent against Pound Sterling, 16 percent against Euro and seven percent against Yuan.
Does anyone seriously believe this reflects Pakistan’s economic fundamentals or its performance relative to these economies? According to critics, it is economic lunacy - a case of the elite protecting their Dollar lifestyle at the expense of exporters and everyone else. It’s cheaper to plan foreign vacations; shopping from Dubai is more affordable; and it costs less to import expensive cars and other durable goods.
While all this goes on, the efforts to build foreign exchange reserves are focused on expensive foreign loans – Euro bond ($2 bn) and Sukkuk ($1 bn) obtained at expensive rates, to name a few. The rest of the money is expected to come from disinvesting profit making entities under the name of privatization. Why only target the low hanging fruits? Why not privatize the loss making entities including various discos, Pakistan Steel Mill and other companies? The money we are borrowing today to fulfill our non-essential import has to be repaid tomorrow. Are we piling up un-sustainable debt?
If Pakistan’s growth is to accelerate to the levels needed to cut poverty, it must be export led. Yet a stronger currency makes exports less competitive. Our policy makers do not appear to have noticed that China’s impressive growth rates over the past two decades were based on a deliberately undervalued Yuan - a policy the US strongly objected. Much of the potential benefit of GSP+ is offset by the 16 percent appreciation against the Euro and the list goes on.
Why economists, analysts and media are reluctant to speak against the damage caused by the current policy? Why are we not having open debate on this chronic issue? We are pressed for a satisfactory explanation.

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