DEPRECIATING RUPEE

MAKES IMPORTS EXPENSIVE AND ADDS TO INFLATION

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Aug 13 - 19, 20
12

The key factor responsible for the depreciation of Pak rupee is widening trade deficit. It is true that imports are growing due to higher import of oil and food items but the country has not been able to boost exports by the corresponding rate. Receipt of record remittances has helped in financing imports; else the country would have faced serious balance of payment crisis. It is highly disappointing that the policy planners are fully aware of the problems and also the solutions but have been failing in taking timely corrective measures.

To begin with let everyone accept the fact that Pakistan has a robust economy. It is evident from the fact that having endured worst floods in 2010 and 2011, prolonged outages of electricity and gas, volatile political situation and ongoing war on terror within Pakistani borders the country has been able to post over 2.5% GDP growth rate and marginally missed the export target. Had the conditions been conducive the country would have achieved even double the GDP growth rate and produced higher exportable surplus.

The growing trade deficit is becoming a major cause of concern. Exports are proving too paltry to finance imports and the situation would have turned real nasty without record remittances received. The situation is not sustainable and adequate measures have to be taken to boost exports and contain imports. For containing oil import bill Pakistan must expeditiously finalize 'oil for food program with Iran'.

According to the data released by Federal Bureau of Statistics Pakistan's trade deficit during FY12 swelled to US$21.27 billion as compared to $15.60 billion for the same period a year ago, this translate into whopping rise of over 36%. At the best Pakistan could fetch exports worth $23.64 billion during FY12 as compared to $24.81 billion attained during FY11, registering a decline of 4.7 per cent. As against this, import grew to $44.91 billion from $40.41 billion during this period, posting increase of over 11%.

Overseas Pakistanis deserve the highest appreciations for sending record remittances. For the first time in the history of Pakistan the remittances crossed $13 billion mark in a financial year. Pakistanis remitted a record amount of $13,186 million during FY12 as compared to $ 11,200 million during FY11, registering an impressive growth of 17.7%. A point worth mentioning is that except for the months of September ($890.42 million) and November ($924.92 million) monthly remittances remained above one billion dollars during FY12.

According to the critics while the situation is becoming unsustainable neither Ministry of Commerce nor the TDAP seem to be doing enough to boost exports. They say the trade deficit has been on the rise ever since the present government came into power. Despite ballooning trade deficit Ministry has remained completely detached from the exporters. Minister has hardly shown his interest in communicating with the stakeholders. This huge trade deficit is turning current account negative, which in turn is eroding value of Pakistani rupee.

Recently Pakistan received $1.118 billion from the Coalition Support Fund (CSF), the last amount of $633 million was released in December 2010. As a result country's total liquid foreign exchange reserves grew to $15,692.5 million, which had reduced to $14,574.5 million on July 27, 2012. Reserves held by SBP were stated at $10,139.3 million and those held by commercial banks were reported at $4,435.2 million. Some analysts say this amount will benefit Pakistan currently facing financial crisis created by poor tax revenues, mismanagement and overgenerous subsidies. Others say release of this overdue amount doesn't offer any sustainable solution for containing erosion of foreign exchange reserves of the country keeping in view the growing quantum of external debt servicing.

Some critics say there is nothing to celebrate and give the news a prominent place in print and electronic media. Withholding of an amount for the services rendered in the past with opening up of Nato supply route was not justified. Experts are also of the opinion that reimbursement of amounts falling due under CSF can't stop erosion of Pakistan's foreign exchange reserves. At the best it can provide a temporary relief, allow the government to payback the borrowed amount to the central bank as well as the commercial banks. They say the worst impact of Pakistan's involvement in 'war on terror' is destabilization of the economy, country losing competitiveness in the global markets and above all living under constant state of war has intensified 'militancy' among the people.

As the country continues to suffer from acute shortage of electricity and gas impairing performance of manufacturing sector, the second best option is to focus on agriculture. However, production of major crops remained below the target during FY12. This may be attributed to 1) reduction in areas under cultivation and 2) rise in price of fertilizers and pesticides. The general perception is that government policies have remained anti farmers.

Pakistan has failed in achieving 3.4% growth target of agriculture sector for FY12 because of less than estimated production of major crops i.e. rice and wheat. For the FY12 the government had set wheat production target of 25 million tons but could achieve production of 23.5 million tons. As against a target of 7.2 million tons rice production actual output could not exceed 6.4 million tons. Wheat production declined by 6.7 per cent mainly due to 2.6 per cent reduction in area under cultivation and delayed sowing. Wheat was cultivated on less than 8.7 million hectares as compared to a target more than 8.9 hectares.

Many experts say that Pakistan can achieve production of up to 20 million bales without bringing additional area under cultivation. Some experts say that some of the major cotton producing countries just don't want Pakistan to become their major competitors. It is on record that in the past when Pakistan achieved record cotton production, in the subsequent years a large part of crop was destroyed due to virus attack. They fear that foreign seed suppliers had deliberately supplies seeds which were highly susceptible to virus attack. This allegation did carry some weight because a significant quantity of imported seeds was destroyed at Karachi port. Is it not interesting that USA has better knowledge of Pakistani cotton crop but the locals don't?