Sep 6 - 12, 20

The incalculable damage inflicted by the ravaging floods has mercilessly exposed three things: corrupt governance, weak infrastructure and safety systems, and a potential but essentially weak economy. While the extent of economic damages will be gradually comprehended, the rupee-rot may once again set in if immediate preventive measures are not taken. The measures require maintenance of a sufficiently high level of dollar-reservoir. The floods seem to have softened IMF stance to a certain extent. This may result in early release of two remaining tranches of $1.3 billion each and a time-out for value added tax and power subsidy issues.

The World Bank and ADB too are showing consideration with respect to their shares of financial assistance. Although IMF is yet to come up with some clear-cut quantitative support, relaxation in fiscal targets is a certainty. The relaxation may include upsizing of fiscal deficit target, relaxed conditions for government borrowing and disbursement of two tranches of SBA in a go. What it may not like to compromise on is the imposition of VAT - reformed GST - as it will hurt the cause of higher revenue targets.

Without underestimating the IMF and international banks' sympathetic stance, we should take hats off to the ever-reliable community of foreign workers whose remittances have always had a reassuring influence on Pakistan's dwindling economy. During July 2010, Pakistan received foreign remittances worth $791 million against $745 million in July 2009 - an increase of more than six per cent. The counterpart, foreign investment is still far from resuming its usual flow. During July 2010, the country received $145 million against $178 million in July 2009 - a drop of more than 18 per cent. The stability of foreign reserves - currently maintained at around $16 billion - is basically dependent on the flow of these two components - foreign remittances and foreign investment. Any adverse trends in foreign reserves are corrected by raising the levels of external loans and liabilities. International oil prices also act as a panic button to keep the nerves of economic managers on edge. Any dramatic rise in oil prices is bound to deliver a direct hit to foreign reserves.

This discourse amply identifies the forces that drive the country's external economy. But that is not all. Pressures on external economy tend to weaken domestic currency which in turn jolts entire economy. The rupee has been fighting the dollar pressure for quite some time - by maintaining the level of Rs86 (or so) for a dollar. Now the floods have placed rupee in a highly precarious position.

Unless new dollar funds are swiftly injected into the reserves position, the rupee is set to succumb to the dollar onslaught. Position will not be clear unless the IMF and international banks' sympathies are translated into quantitative offerings. Besides early release of $2.6 billion of SBA (and of other assistance funds, bilateral support fund etc.), Pakistan perhaps may like to be helped with a moratorium on debt servicing.

Revisiting past is one of the many fatal attractions of history. Sadly enough, in this case, the revisiting is not down the ages, it is just down the last three years. We had a sound economy with no IMF strings attached. The same $16 billions were all ours whereas the present $16 billion have an IMF loan contribution of $9 billion. The dollar was kept stable at Rs61 (or about) for almost a decade. Within a short period of less than three years, more than 40 per cent devaluation of Pak rupee has not only squeezed the country's economy but has also tightened the noose around the common man's neck. Those who have mercilessly ravaged this country are seen these days making uneducated analyses of the flood damages. These analyses invariably culminate in the giving of a frantic begging-call to the world community which, despite being moved by the situation, feels uncomfortable about the prospects of utilisation of its aid money. Being generally devoid of economic and financial sense, none of the democratic stalwarts appear concerned about the implications of Pak rupee's war of attrition against the dollar. Even Pakistan's economic managers and monetary regulators do not seem aware of the situation. They even can't give a cogent reason for this uncalled for sliding of rupee in the face of an improving economy and a comparatively better reserves position. They fail to explain how the previous government succeeded in keeping the dollar within a narrow band of 58-62 for almost eight years, and that's why they are unable to keep the slide of rupee within a reasonable and manageable limit.

The impact of a weakening rupee on the economy is multi-dimensional with a number of negatives and a few dubious positives. The increased cost of inputs pushes the consumer goods prices to a level that is unmanageable even for the middle class leave alone the lower middle class and below-poverty-line hapless masses. GDP goes up, but so does the external debt liability in rupee terms. Since Pakistan's is an import-dependent economy, any benefits enjoyed by the exporters are more than offset by a higher import bill in rupee terms. The higher export proceeds are not in dollar terms. For the exporters too, the gain is not an unmixed blessing; the increased cost of production wipes out most of the gains on proceeds side. The increase in GDP and GNP is not reflected in per capita GNP in dollar terms.

During 2009-10, GDP and GNP at market price recorded increases of 15.1 per cent and 16.5 per cent respectively, but when seen in dollar terms, the per capita GNP showed an increase of 7.6 per cent only. Even this increase becomes unreliable when the GNP is measured against the current exchange rate of Rs85.6 a dollar.

The most damaged single entity of the economy in consequence of the rupee free fall was the stock market. After touching the 16,000 level, the KSE-100 index breached the 5,000 mark to completely shatter the investor confidence. The common small investors as usual were the main casualty; yet the avalanche took some stock bigwigs to the ground as well. Foreign portfolio investment vanished into thin air within a short period of one year. During FY09 the bourses had a negative flow of foreign portfolio investment. The lower equity prices and a weaker rupee have triggered a comeback of foreign portfolio investors. The development however is of short-term nature and is likely to do more damage than any good in the long term.


FY06 FY07 FY08 FY09 FY10
351.5 1,820.4 44.3 (510.4) 587.9