Devaluation

A disease is a “disorder of structure or function especially one that produces specific symptoms.” And a symptom is an “indication of the existence of something, especially of an undesirable situation.”

Devaluation is a symptom, not a disease. The Pakistani rupee losing value against the US dollar is a symptom, not a disease. Devaluation is an ‘indication of the existence of something undesirable’. The disease is the ‘cost of doing business’ in Pakistan; devaluation is a mere symptom.

For the past couple of years, Pakistan’s ‘currency policy’ has had four ingredients: ego, figure fudging, artificial controls and dollar-denominated loans. In the second week of December 2017, Pakistan’s ‘currency policy’ was handed over to two entities: the IMF and currency speculators.

Over the past week, our foreign loans have gone up from Rs8.9 trillion to Rs9.4 trillion; an increase of Rs500 billion. And that means an additional debt burden of Rs17,000 for each and every Pakistani family. Over the past week, the value of our annual imports has gone up from Rs5.7 trillion to Rs6.1 trillion; an increase of Rs330 billion. And that means an inflationary burden of Rs11,000 for each and every Pakistani family. Lo and behold, the rupee devaluation of the past week has cost each and every Pakistani family a hefty Rs28,000. And the story of this suffering hasn’t come to an end yet.

The captain-less Ministry of Finance is out to suppress the symptoms – nothing about the disease so far. The disease requires chemotherapy; the only thing that our Ministry of Finance is administering is aspirin. The cure of the disease lies in chemotherapy and aspirin would only suppress the symptoms (that too temporarily).

The ‘cost of doing business’ in Pakistan has at least three components: expensive electricity, expensive gas and an oppressive tax system. Some five years ago, Pakistan and Bangladesh’s exports were at about the same level – around $25 billion a year. Bangladesh has since moved up to $38 billion a year while Pakistan went down to under $20 billion. If our exports had kept pace with Bangladesh we would have had no balance of payment crises.

Imagine: the cost of natural gas to Pakistan’s industry is 2.6 times that of Sri Lanka’s. Imagine: labour cost in Pakistan is 2.3 times that of India’s. Imagine: the electricity tariff in Vietnam is $0.07 per unit as oppose to $0.11 per unit. Imagine: the gas tariff in Bangladesh is $0.03 per unit as oppose to $0.86 per unit.

Pakistan, for instance, produces around 100 billion units of electricity a year at a cost of $11 billion. Vietnam produces the same for $7 billion. What that means is that Pakistani electricity consumers are paying $4 billion a year over and above Vietnamese consumers. How can Pakistani exporters compete with Vietnamese exporters?

What’s the way out? The only way out is to reduce the ‘cost of doing business’ in Pakistan. The only way out is a wholesale renegotiation of sovereign contracts throughout our energy sector. There is no other way that the government of Pakistan – regardless of which political party is in power – can bring down the ‘cost of doing business’ in Pakistan.

Yes, Tanzania has renegotiated sovereign contracts in the past. So have Ecuador, Costa Rica and India. Devaluation won’t do it.

The writer is a columnist based in Islamabad.

Email: farrukh15@hotmail.com Twitter: @saleemfarrukh