SHAMSUL GHANI (shams_ghani@hotmail.com)
Jan 26 - Feb 01, 2009

According to a recent UN report, the impact of the global economic crisis has impacted South Asian economies indirectly by destabilizing them on employment and liquidity fronts. The capital outflows back to the investor economies to support their own domestic liquidity position have put immense pressure on developing economies like Pakistan. Employment in the region has also suffered as massive job cuts have taken their toll on the labor-intensive export industries like textiles. Pakistan's textile sector already reeling under the pressures of energy crisis, law and order situation and unusually high policy rate is now experiencing sagging export demand for its products. Our export sector is largely dependent on textiles. Government's failure to give genuine relief to this sector is going to hit our exports to a damaging extent. The report forecasts stagnating export performance in 2009 for South Asian economies where trade balances are likely to remain under pressure in the wake of weaker demand in overseas markets. In our case, workers' remittances - the only redeeming factor - are also expected to take a downturn in consequence of the falling oil prices as most of these remittances come from oil-rich Middle Eastern countries. This will further aggravate our external accounts position.

Pakistan's exports during the half year (July-December 08) have shown a mixed trend. Exports of non-textile items have recorded a growth of 29.3 per cent to $ 4.436 billion as against $3.43 billion during the corresponding period of the last year. On the contrary, the textile exports declined by 1.74 per cent to $5.137 billion as against $5.228 billion last year. The increase in non-textile exports owes much to the rice export that went up by 109.5 per cent to $1.123 billion. We are now the fourth largest exporter of rice after Thailand, Vietnam and United States, according to the US Department of Agriculture data Under non-textile exports, carpet and leather registered decline in the face of rising cost of doing business and fierce competition from India and China.

Thanks to the depreciated rupee, the textile exports in rupee term recorded a growth of 22 per cent. This gives the textile industry a reason to fight for survival, although it does not lessen our external account woes. The import of textile machinery has witnessed a drop of 37 per cent which shows that the textile sector is not interested in making fresh investments in the industry. This sounds a bit enigmatic as a more than 30 per cent depreciation in Pak rupee should be an incentive for textile exporters. In fact our over-dependence on textile exports has made the textile lords a bit over-demanding. During textile boom period, they amassed huge wealth. Now when the country is passing through a difficult economic period, they should join hands with the government and tighten their belts to do whatever good they can, in the given situation. The government should also reciprocate by conceding to their just demands. The cost of business has certainly gone up, but a depreciated rupee still remains a positive incentive.

The policy rate hike is blamed, perhaps rightly, for hugely increasing the cost of doing business. The objective behind the interest rate hike is generally the control over excessive liquidity and prevention of credit diversion to the unproductive sectors. The economists stand firmly divided over the efficacy of this policy tool to control inflation. Keynesian view subscribes to the use of interest rate hike in mild recessionary / full employment situations. We are definitely not in the full employment situation. The domestic and international events have thrown us into the lap of recession. In essence, ours is an expanding economy and any unwarranted interference, be it political, fiscal or monetary, is undoubtedly going to damage it. In the world of falling interest rates, we have singled ourselves out as an unusual economy putting our reliance on some questionable monetary policy measures. What makes us so special as to deny the globally accepted economic rules?

The debate on policy rate reduction or further rise on IMF nod is on since last few months. The business and industry are in waiting for the SBP verdict on January 31. Surprisingly, the government has preempted by giving signals for no further increase in discount rate. The debate usually revolves around the core inflation which has shown a marginal decline during the last two months. According to some, the decline is not so significant as to nudge IMF to change its stance. Policy rate change or no change, the solution to inflation lies somewhere else. It rests with the administrative measures that are long due the measures that ensure passing of benefits accruing from global oil and commodity prices decline to the masses and the economy. The business and industry certainly need relief in the shape of 300 to 500 basis points phased-cuts in the policy rate during the CY 2009. Economic growth can not be achieved and investment can not be stimulated under an exorbitantly high interest rate regime. We have seen it in the recent past when an interest rate matching with those of the regional economies worked wonders and our $60 billion economy of 2000-01 expanded to a $150 billion plus economy within a period of seven years. The uninitiated and the diehard critics of the previous government's economic policies are still harping on the same tune. Their own failures don't permit them to give credit to their rivals' economic achievements for this country. They should go through an economic news article appearing in the Dawn of January 18, 2009, titled as "IMF okayed loan on 'basis of ex-govt's policies'". According to the article, an official source conceded:

"We reported to the IMF what ever was factual and based on evidence."

The article concludes with the following remarks:

"The short term liquidity facility established by the IMF was for those countries which have a good track record of sound policies, access to capital markets and sustainable debt burdens with a size of loan up to 500 per cent of quota with a three-month maturity."