Clever currency management critical to stable economy

LAHORE: Like any sovereign state Pakistan has the right to manage its currency to keep its national economy stable, but it should also take measures that ensure reduction in outflow of foreign exchange through various means.

Pakistan is currently facing a situation similar to the one it was in ahead of 2008 elections. Shaukat Aziz, the then prime minister, managed to keep the rupee stable for almost five years through various measures. The Pervez Musharaf regime was certain that it would retain power in the next elections. Things however turned ugly during its last year. Global food crisis impacted Pakistan a year ahead of election. The inflation shot up to double digit. The wheat prices soared a few months after Pakistan had exported its surplus wheat. Yet, the then regime made contingency plans to put the economy back on track. The ruling party lost the election.

As is the custom in Pakistan, the contingency plan was never shared with the party that formed the new government. Resultantly the new rulers found themselves in deep crisis with no clue how to tackle it. The economy nosedived and the rupee plunged to record lows. The inflation soared to 20 percent and manufacturing growth stalled. After the crisis gripped the country, Dr Salman Shah, the interim finance minister, explained various measures that could have helped avert the crisis including liquidation of some government assets in global capital market, but the damage by that time.

This time around we don’t have anyone who could readily succeed Ishaq Dar if he is disqualified or if the present ruling party losses the next election.  It is in our national interest that whoever comes to power should ensure the continuity of economic policies. These policies have delivered as the rupee is stable, interest rates are low and inflation is still around 4 percent. We cannot afford to devalue the rupee as suggested by the International Monetary Fund (IMF). Four years back, the IMF, while sanctioning a three-year loan facility, had asked Pakistan to depreciate the rupee, but was met with a refusal. Against all the prevailing fears, the IMF did not block the loan and continued disbursement of its tranches till the end. It was because Pakistani authorities convinced the IMF that they can defend the rupee and proved it.

We all know that our imports are 2.5 times higher than our exports. Any decline in the value of rupee would increase the rates of every imported item including petrol, edible oil, and industrial machinery. These, however, are not the only items that we import. Luxury items like used cars, cosmetics, furniture, mobile phones, processed food, televisions, air conditioners and what not is also being imported. These are unnecessary imports. 

All the government efforts against the import of luxuries have proved futile. But these imports, amounting to about 20 percent or $9.15 billion, are a burden on our foreign exchange reserves. There are many ways to nullify this impact. For instance, rules allow only Pakistanis living abroad to import used cars. In practice, however, these cars are sourced by commercial importers from foreign countries. These importers buy used cars in the name of overseas Pakistanis and pay their foreign sellers in dollars transferred through Hundi. Since these cars officially belong to exapts, they should be asked to clear government levies in foreign exchange. This will somewhat compensate the loss of dollars spent on their import.

In the same way the importers of luxury goods should be asked to buy dollar from the open market and pay government duties and taxes in foreign exchange. This will to some extent stem the loss of dollar through official channels. Currently in order to prop up rupee the central bank buys dollars from the open market at a higher than official rate to increase its reserves or sells its reserves in small amounts in the open market when there is a shortage of greenback in the market. The SBP however has ensured that it always maintains foreign exchange reserves enough to finance four months of Pakistan’s imports. The rule of thumb says that there is no threat to a currency if a country is capable of financing three months of its imports from own resources.

The export facilitation scheme should be extended to all exporters without the condition of increasing exports by 10 percent. Next year they should be asked to enhance exports by 3 percent to qualify for rebate. The funds required would be less than additional amount spend on imports if the rupee was devalued.