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Containing erosion in rupee value

If anyone goes through the history of Pakistan, one point is very clear that the country has been living on the crutches of multilateral lenders. My critics may say that there is nothing wrong as many countries also borrow from multilateral financial institutions. I have a narrative, others borrow to accelerate their GDP growth and Pakistan borrows to pay off its debts acquired in the past. The result is that the country is sinking deeper into debt and one finds no hope of coming out of this vicious circle.

According to an analyst, “At present Pakistan is not borrowing to accelerate its GDP growth rate but to 1) meet its budget deficit and 2) pay off debts acquired in the past. The burden of local and external debts and their service has become unsustainable. One needs not make too much effort, but simply look at the quantum of borrowed dollars in country’s total foreign exchange reserves that reveals the harsh reality. Pakistan has just raised over two billion dollars from the international markets at a fabulous interest rate of nearly 6.5% per annum. This decision was made by the ruling junta only to show the Pakistan need not approach lender of the last resort, International Monetary Fund (IMF). Ironically opposition is also deaf and dumb as it didn’t oppose the move. To be honest there is no opposition in the country because the two opposition parties i.e. PPP and PTI have formed governments in two provinces and are virtually part of the ruling junta”.

According to another analyst, “The ruling junta is not doing much to enhance exports, contain import and use aid/grants/loans extended by the multilateral lenders. Most of the borrowed money is either utilized to meet current expenditures or invested in projects which can’t generate additional funds for the government in the local currency as well as foreign exchange. It may be true that a lot more needs to be invested in the development of infrastructure projects, but most of the projects undertaken by the government are incapable of generating revenue for the government. There is a lot of hype about projects being constructed under China-Pakistan Economic Corridor (CPEC). All these may contribute in the future, but just can’t help in containing current account deficit and overcome debt servicing, particularly the external debt”.

Over the years exports have proved too paltry to finance ever-increasing imports. The policy planners have failed miserably on both the fronts: 1) boosting exports and 2) containing imports.One of the best case studies is inability of Pakistan to take the fullest advantage of GSP Plus status granted to it by the European Union (EU). One should not forget that India emerged the biggest opponent of the facility but the EU went extra mile to support Pakistan in overcoming its balance of payment crisis. Pakistan mainly failed in benefitting from GSP Plus status because of 1) extensive load shedding and 2) high cost of doing business, rendering it uncompetitive in the global markets.

According to a power sector expert, “Pakistan does not suffer from shortage of energy but grossly mismanaged sector. The key contentious issues are: 1) rampant pilferage of electricity and gas going on with the connivance of the employees of the utility companies, 2) imposition of high taxes on energy products to meet the shortfall in tax collection by the Federal Board of Revenue (FBR), 3) lack of capacity to conceive and construct mega infrastructure projects suffering from delays and over runs and 4) rampant corruption and embezzlements”.

 

Ever since the incumbent government has come in power, it has been talking about eradicating load shedding in months and days, but the country continues to suffer from prolonged outages of electricity and gas. On top of all there has been persistent increase in electrify and gas tariffs. Even the regulatory authorities i.e. NEPRA and OGRA have been protecting the government owned utility companies rather than the interest of general public. As the Government of Pakistan embarked upon liberalization, deregulation and privatization program these regulatory authorities were established to protect the consumers rather than the government. However, their track record shows the contrary as these have been endorsing the government decisions only.

Lately, the government suddenly asked the furnace oil based power plants to close down their operations, to encourage use of imported LNG. While making this strategic decision the policy makers completely overlooked two strategic points: 1) the negative impact of this decision on the local refineries already operating below optimum capacity utilization and 2) fate of the L/C opened by Pakistan State Oil Company (PSO), which caters nearly 65% of the local demand of furnace oil, mainly through imports. Though, the decision has been reversed, but shows complete lack of coordination among different ministries.

It has been highlighted in these pages repeatedly that the inconsistent government policies are the biggest hurdle in fresh investment and smooth operations of the agriculture, manufacturing and services sectors. Since independence the country has remained dependent of export proceeds generated by textiles and clothing industry and failed in broadening export base. In fact the government has remained hostage of the spinners, which constitutes one of the most inefficient sectors. It has enjoyed extra ordinary incentives but failed in upgrading the manufacturing facilities.

Moral of the story

Having read the above narrative, one can conveniently arrive at a conclusion that many of the decisions of the Government of Pakistan are not based on any home grown plan but either on the instructions of multilateral lenders or by the groups having vested interest and also access to the power corridor. The consensus on strategic policies seems completely missing. To contain erosion in rupee no rocket science is required, but various facets of an integrated policy have to be linked in a manner that the sole purpose of the policies remains boosting GDP growth of the country.

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