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Counting the factors responsible for weakening rupee

Over the years value of rupee has been eroded by either devaluation or crawling depreciation. The incidents of sudden and massive devaluation are few but persistent depreciation is common. Since the country suffers from adverse balance of payments, there has always been a pressure of multi lenders on Pakistan to boost its exports. The successive governments has been following the advice blindly, rather than coming up with a home grown plan. Some of the countries facing far precarious economic conditions took helps of the Pakistani economists are now far ahead of us. This clearly indicates that the policies advised by the multilateral lenders are not aimed at supporting the country to stand on its own feet. Some cynics even go to the extent of saying that the recipes provided by the multilateral donors are aimed at keeping the borrowers under the shekels.

This seems true for Pakistan which has been following the foreign policy agenda of the global and regional powers but never allowed to become a self-sustaining economy. Many Pakistani experts take pride in claims that Pakistan has remained under the International Monetary Fund (IMF) program for the longest period and has never committed any default. However, some experts have a contrary opinion and say, “The multilateral lenders, including IMF have been assigned the task by its sponsors to give only that much to Pakistan, which can save it from default and make the conditions more stringent if it appears that the economy of the country is becoming stable. Lately, when Pakistan’s foreign exchange eroded, multilateral lenders were prompt in dishing out funds for ensuring timely debt servicing”.

There is no doubt that Pakistan has been towing the US foreign policy agenda since independence. It was used against China and Russia for containing proliferation of Communism. However, in sentries when the US wanted to develop friendship, Pakistan played the role of mediator. Pakistan was used by the US to fight a proxy war in Afghanistan, which has been going on for more than four decades. To reward Pakistan, the country is paid paltry amounts fur providing logistic support. The US often term Pakistan ‘front line partner in the war against terror’ but the mantra of ‘do more’ goes on. Ever since becoming part of this war Pakistan’s economy has been a victim of terrorism in which hundreds and thousands of people have been killed and the losses caused to the economy runs into trillions of dollars.

The strengths and weaknesses of Pakistan’s economy are known to all. Its primary strength is agriculture and agro based industries. For decades the country has remained net importer of what and cotton and continues to import over US$2 billion edible oil per annum. Once upon a time the country had one of the largest man-made irrigation systems, but now suffers from acute shortage of irrigation water because the last mega size dam was constructed in 1976 and since there has been no addition. These dams were also a source of low cost electricity. However, funding to WAPDA was curtailed drastically and the country was forced to establish furnace oil based thermal power plants. The shift in the policy of multilateral lenders caused two dents to Pakistan, shortage of irrigation water and hike in the cost of electricity produced in the country. At present most of the industries suffer due to extensive load shedding of electricity and gas, which renders them uncompetitive in the global markets.

 

It is also necessary to point out that the focus of Pakistan government remained on textiles and clothing industry, to be précised on spinning. The industry flourished during the textile quota regime but since abolishing of that system has plunged deeper into the problems. Lately, Pakistan was able to attain the status of wheat exporting country but no significant quantity could be exported because of higher cost of production. Same is the case of sugar and urea export. Despite enjoying handsome exportable surplus of these two commodities, local manufacturers could not sell their product to overseas buyers. Yet another industry facing the same fate if cement. At the best it could export cement to India and Afghanistan due to the common border. Export through ships to other countries is not possible unless the government offers subsidy.

Rising imports also tell some strange stories. Local refineries operate below optimum capacity utilization because oil marketing companies complain that imported furnace oil is cheaper as compared to the one produced indigenously. According to a sector expert, “Pakistani refineries have gone obsolete due to the lack of timely BMR. At the best these refineries could meet 20% of the total demand. On top of this indigenous production of crude oil has also remained low. Since most of the exploration companies operate in the public sector, the government asks them to pay huge dividend to meet revenue collection shortfall.”

Over the years huge remittances, exceeding one billion dollars have been a major source of foreign exchange. As the price of crude oil plunged many of the construction projects was either abandoned or faced slow down. Therefore, the demand for labor, the biggest source of remittance from the Middle East, started gradually drying.

Moral of the story

Pakistan has to produce exportable surplus, which on one hand will help in achieving economies of scale and on the other hand earn extra foreign exchange. Along with boosting exports, import of luxury items has to be contained. The government will have to focus on boosting remittances. With the economic down turn in the Middle East, remittances are on the decline.

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