EDITORIAL: Finance Minister Shaukat Tarin has asked Commerce Ministry to conduct a sensitivity analysis and build scenarios for effective forecasting of imports and exports. Sensitivity analysis is defined as a what-if simulation analysis and determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions; and building scenarios implies defining what you set as the target, gathering data by identifying key factors/trends and uncertainties that may compromise these targets, separate certainties from uncertainties and develop scenarios. In Pakistan, the range of uncertainties today is overwhelming – from Covid-19 fourth wave to the Afghan crisis and last but not least the success or otherwise of the sixth review talks with the International Monetary Fund.
Pakistani administrations, including the present one, rely on a set of policy decisions that have not varied over time premised not on empirical data but on interactions with either (i) stakeholders who have an inherent interest in seeking fiscal and monetary incentives, or (ii) surveys which may have an inherent experimenter bias.
Five major export industries for example have traditionally been extended fiscal and monetary incentives, including a low discount rate, zero rating of sales tax, as well as utility charges comparable to those available to their competitors in other countries which require from the perspective of the treasury lower revenue collection, cross subsidization at best and budgeted subsidies at worst. This is not to argue that the assumptions have been flawed but to emphasize that an empirical study as opposed to an interaction with stakeholders is the right way to proceed before committing to a policy/strategy.
In economic theory, a lower than the market value of a currency makes exports competitive internationally, a policy that the US has accused China of supporting, while it would negatively impact on imports, thereby reducing the current account deficit. However, in the case of Pakistan, the linkage between exports and the external value of the rupee has not been established and this was clearly revealed during 2018 till March 2020 with a massive rupee depreciation. At the same time imports were curtailed that did result in current account deficit containment but at the cost of (i) stifling of economic activity as import of raw materials was no longer economically feasible; and (ii) a massive rise in domestic inflation as oil and products/cooking oil imports became prohibitively expensive. Pakistan is on a market-based exchange rate system, and the rupee is not determined by market forces as in the US, the UK or EU, and hence there is a need to revisit the exchange rate depreciation from May 2021 at 153 rupees to the dollar to over 167 rupees to the dollar today especially as disorderly market conditions prevail given the daily influx of between 5 and 7 million dollars a day has ceased subsequent to the Taliban take-over of Afghanistan.
Pakistani governments place great reliance on survey results. Two come to mind. First and foremost, the significant improvement in ease of doing business survey, undertaken by the World Bank, continues to be cited by the Cabinet; however, the World Bank has rightly abandoned this survey as Pakistan’s rating improved in ease of doing business at a time when productivity plummeted to around 1.5 percent pre-pandemic. And secondly, the business confidence survey that maybe subject to considerable experimenter bias. Before extending incentives/subsiding inputs including electricity it is, therefore, necessary to determine the causal link between the incentive and the resulting output which necessitates relying on empirical data as opposed to surveys.
Copyright Business Recorder, 2021