LAHORE: Currency cannot be stabilised in the long run on borrowed money. Real stabilisation would come only when we are able to increase our exports to or near the import level. Current engineered rupee stability would crash without increase in exports.
The government and the central bank are still in fire fighting mode as they have taken no concrete step to boost exports and ensure productive utilisation of the huge remittances. In fact, the state cannot afford to let the remittances coming in consumed in the import of technology.
These remittances are the major source to reduce the current account deficit. Workers’ remittances are the largest source of foreign exchange inflow in the country.
Even the textile exports of $13 billion are $9 billion less than what the workers send annually to Pakistan. These remittances are equivalent to 75 percent of our total exports.
Most of these remittances are wasted in consumption. Even if 20 percent of these remittances are geared toward industrial investment it would be two times higher than the foreign direct investment that we yearly receive.
According to some reports, the textile industry, our largest export sector, is operating at its full capacity. This means no further increase in textile exports can be expected unless we increase textile capacities.
Investors have no clue how to move in this regard. They might get project loans at subsidised mark-up, but they would be getting working capital to service both project loan and working capital at least for five years. That would be an uphill task for entrepreneurs.
Bringing down the policy rate could lure in new investment, but the dilemma is that a single digit policy rate could discourage foreign fund managers, who would lose interest in the treasury bills and billions of dollars injected into these bills would be disinvested.
Despite appreciable import compression, the current account deficit is still very high that can only be lowered through higher exports. And as already mentioned, to increase exports there is a need to increase capacities.
Low oil prices would provide the government much needed relief and compensate for the slowdown or withdrawal of hot money. However, this opportunity would not last long. Today, oil prices almost crashed, but very soon the oil producing countries would reform their cartel and drastically reduce production to shore up prices.
A decrease in policy rate by four percent would also provide the government a much needed relief in its debt servicing. We would be marginalising our economy further by reducing the interest rates slowly as industrial investment would only come after the policy rates drop below double digit.
GDP growth would also accelerate because the cost of doing business would appreciably come down. Job creation is also subjected to decrease in interest rates that would spur demand.
The State Bank governor has always been talking about sustainability of growth. Current central bank policies are not promoting sustainable growth, but are making the economy dependent on regular influx of high cost hot money.
The stability of rupee from borrowed money is not sustainable. We will have to loosen our monetary policy to provide breathing space to the investors, who have been strangulated by the high interest rates.
How can we expect growth when our policy rate is at least two times and in many cases three times higher than the regional economies? Our inflation is cost push. By increasing interest rates we are indirectly fuelling inflation, as the government’s debt servicing cost also increases, and with it the appetite for public loans also soars.
The government has reduced private sector borrowing by increasing interest rates. It declined by 50 percent. However, the government did not reduce its own borrowing by keeping the interest rates high. It continues to borrow from commercial banks to fulfil its operational needs. It is also the largest borrower in Pakistan.
So the money supply continues to increase because of government borrowing no matter what the interest rates are. It fuels inflation, but if the interest rates are lowered it would reduce the borrowing needs of the government at least to the extent of its debt servicing burden.
