The good, the bad, and the ugly side of Darnomics

KARACHI: Although Pakistan’s economic policies in the past four years have been applauded by all the creditable global institutions, some Pakistani experts, who are critical of economic performance of the country under the current government, are terming it as Darnomics. 

These naysayers do not appreciate the improvement in economic indicators. They attribute the currently tame inflation to lower oil prices, but can’t explain why it’s still higher in India or Bangladesh.  The interest rates are very low. The banks have surplus cash for loans though these critics say the government borrowing has crowded out the credit for private sector. 

When the interest rates were high, the banks were very much interested in loaning out to the government but with low interest rates they prefer private sector that pays a higher premium that’s above the State Bank of Pakistan’s (SBP) discount rate. 

No bank would, however, do business with the companies having tainted balance sheets. Those that have healthy balance sheets are getting loans. The bashers point out that the rupee is overvalued, which is hampering exports and boosting imports. The rule of thumb propagated by most of these experts in the past was that as long as the country has foreign exchange reserves that could finance more than three months imports, there was no pressure on the rupee value. The central bank has foreign reserves that could finance about four months of imports. Still, if the argument that the rupee is weak is accepted, it is in Pakistan’s interest to keep rupee strong as our imports are more than double our exports.

Devaluing rupee by higher percentage would trigger inflation in the country as there would be high increase in the rates of all imported items as the duties would have to be paid on higher amount. 

As far as exports are concerned it has been seen time and again and beyond doubt that exports had remained almost stagnant in all depreciations of the past. The government is doing the right thing by letting the rupee slip slowly against the dollar to arrest any high devaluation shocks to the economy.

Domestic consumption is increasing at a healthy pace, which shows the people now have consumable surplus. Housing sector is buoyant, car and motorcycle sales are up, and tractor and bus sales are surging. Home appliances manufacturers are in an upbeat mood. Retail stores are flourishing. Unemployment is down. Services sector is booming. All these sectors are competing with the imports.  The exports however remained under stress during last four years. The exports have started going up in [past three months but mostly in value-added sector.

The country is gradually shifting from low value-added exports to higher valued exports in both textile and leather sectors which is a good sign.  Majority of exporters see Ishaq Dar, the finance minister, as a villain because he refused to bail out the influential exporters through subsidies and incentives.

He had in fact learnt his lesson from the past history when textile sector was granted relief on loans, whenever they were in trouble. It benefited the efficient producers immensely that expanded their capacities regularly and stayed much ahead of moderately efficiently producers. In the last 50 years, whenever the sector came under stress it was shored up by the government and every time the gap between the most efficient and comparatively less efficient widened.  Unfortunately, this highest export earner never really paid any taxes as the entire value chain of the textile sector is engineered in such a way that it is impossible to trace the monetary transactions. This way they saved billions in sales tax as well as income tax.  It has been reported many times in the media that the sales fashion fabric in Pakistan has crossed Rs500 billion per annum.

The producers charge four to 10 times’ higher price for their brands against similar unbranded products. One can easily say that the net earning on branded fabric is not less than Rs300 billion per annum which means an income tax of at least Rs93 billion.  However when we go through tax directory the entire textile sector pays taxes that are almost negligible.