Economic equilibrium

September 26, 2021

This government is facing a decline in rupee for the second time in its three-year tenure, not to mention uncontrolled inflation, and rising inflation that clearly point to policy failures of this...

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This government is facing a decline in rupee for the second time in its three-year tenure, not to mention uncontrolled inflation, and rising inflation that clearly point to policy failures of this regime.

Within the first year of its tenure, the rupee decline from its August 2018 value of Rs124 against the dollar to over Rs168.50 against the greenback. However, it rebounded and started to trade at Rs152 against the dollar in the next 12 months.

After a relatively stable time, in the last four months, the local unit has been on a rollercoaster, declining to a historic low.

The policy rate of the State Bank of Pakistan (SBP) was 7.5 percent when this government assumed power. The interest rates went on increasing to reach 13.25 percent until the novel coronavirus disease Covid-19 hit the world.

The interest rates eased back to 7 percent, which is 2-3 percent less than the prevailing inflation. This policy rate was maintained for a long time despite the fact that the rupee started declining slowly and then dropped suddenly with a bang.

The SBP acted very late and nominally increased the policy rates by 25 basis points to 7.25. The rupee however continued to remain under stress.

When this government assumed power, it inherited a big current account deficit of around $20 billion. It took drastic steps to control the deficit.

The government slapped regulatory duties on numerous import items and on luxury imports. It asked the importers to deposit the entire import amount at the opening of the letter of credit. Many other steps were taken to curb imports. Finally, the current account deficit was wiped out. In fact we posted a current account surplus for a few months.

Buoyed by its trade regime, the government started easing import curbs. Numerous regulatory duties were eased and the trade regime was liberalised.

Policy makers went to the extent of allowing import of electric vehicles at zero or nominal duties. The liberalisation of trade has started playing havoc with the current account deficit. Pakistan’s imports crossed $6 billion per month in June and August and near $6 billion in July.

The exports did go up, but at a much slower pace than imports. This is despite the fact that the government did a tremendous job in motivating overseas workers to remit money through official channels.

Remittances increased by $7 billion per year during its tenure, which helped contain the deficit. In fact remittances emerged as the largest export earner during the PTI regime.

When the government announced EV policy, domestic industry cautioned the planners against the fallout of importing expensive vehicles that were unlikely to make any dent in the pollution – how can import of 3,000-4,000 EV cut pollution, when over 4 million non-EV vehicles are driven in the country

It was only an elite pleasing exercise as only the richest of the rich could afford it. They were favoured with duty waiver of billions of rupees. The government on the one hand is trying to please the poor through non-transparent subsidies, few of which reach the deserving.

On the other it has pleased the richer segments by allowing them to import EVs at nominal duties. This appeasement was not necessary because the rich were already pleased with the state that has allowed them to loot the common man without exerting its writ.

During the first two years of squeezing imports, the GDP growth was compromised, clocking 1.9 percent in the first year of this regime and minus 0.4 in the second year.

It had to liberalise imports to unleash growth and succeeded as well, but at the cost of rupee depreciation and high inflation. Prudent governments strike a balance in policies to arrive at a compromise on growth, wellbeing, rupee dollar parity and inflation.

This government is in the habit of taking extreme steps that disturb the economic equilibrium drastically. In the first phase, its policies resulted in a decline of growth by 150 percent in the first year and negative growth in the second.

In the third year, the growth jumped by 400 percent (from minus 0.4 percent to 3.94 percent). A growth of 2 percent would have maintained stability. Is it not ironic that at 3.94 percent growth, our planners say that the economy is overheated? This speaks volumes about our economic strength.

The Indian or Chinese economy that also dipped after Covid-19 in to the negative zone did not over heat on returning to high growth of 6-7 percent.

The economy of Bangladesh is in normal zone at 5.7 percent growth after Covid-19 decline. Our planners should go back to the drawing board and evaluate the fault lines in our policies instead of changing them on whims.

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