Devaluation of rupee: Current account deficit to swell if exports don’t go up

LAHORE: State Bank of Pakistan’s former governor Dr Ishrat Husain said on Wednesday that rupee devaluation should further accelerate exports. He advised the planners to take measures to keep the cost of industrial investment low by adjusting duties and levies on industrial investment. “If exports don’t go up, the current account deficit would be enlarged.”

Husain said the economy has absorbed the devaluation shocks on inflation and planners hope that recent devaluation will not be inflationary as well.

Husain, while speaking at the 7th retailers’ conference, said Pakistan’s debt was 100 percent of its GDP at the start of the century, which reduced to 50 percent of GDP by 2007 due to higher growth and doubling of exports. He said borrowing is not bad as long as you prudently use your debt in ventures that have the ability to pay back as well as result in source of regular income.

The economist said Pakistan’s economy, in its entire history, did go through cycles of boom and bust but always recovered through better policies. “Pakistan remained among the top 10 growing economies of the world from 1950 to 1990 and the growth occurred despite the fact that the country inherited no wealth or infrastructure at the time of independence,” he added. “During the 2002-07 period, Pakistan was ranked among the world’s top three growing economies after China and India.”

Husain said the economy is now on a growth path. Last year it grew 5.2 percent and this year growth is expected to be in the range of six percent. The growth would be 6.5 percent next year, he added.

SBP former governor said a large middle class of 60 to 65 million that earns $5 to 10 per day sustains the present growth. “Retail sector is one of the fastest growing segments of our economy because of this strong middle class.”

Husain said the buying tastes of tech-savvy urban middle class are changing in line with the global trends. They now prefer brands: be they national or international, he said. Large shopping malls are rapidly coming up in large cities like Karachi, Lahore and Islamabad. The shoppers in smaller urban centres are buying brands through e-commerce platforms, he added.

The economist said the per capita income in Pakistan is on the rise. Many foreign institutions, including Price Waterhouse Coopers have predicted that Pakistan would be amongst 20 largest economies of the world by 2025. “The economy would have to overcome a few challenges.”

Husain said as the economy grew over five percent the domestic industry is unable to fulfill the increased demand that has to be met through imports. Power shortages of the recent past have been the main reason for the handicap as it discouraged investment in manufacturing sector, creating a gap between demand and production.

“New investment is a must for plugging the supply gap,” he added. “With assured power supplies the industrial growth would pick up.” SBP’s former governor said the exporters had orders in hand but they were unable to meet the demand due to power shortages. So, exports declined to $22 billion from $25 billion. “With smooth power supplies the exports should have been $36 billion by now.”

Husain said the power shortages have smoothened since August last year and therefore exports increased around 12 percent in the last eight months. On foreign direct investment (FDI), the economist said most of the FDI is presently coming from China. “However, keeping in mind the market potential Pakistan cannot be neglected by other foreign investors for long.”

Husain said multinationals operating in Pakistan are getting an average 22 percent return on investment. Pakistan is a buyers’ market. Infrastructure and power issues in the country have largely been resolved. “The country unjustly still carries the tag of terrorism although even this issue has been completely resolved,” he added. “Any foreigner who visits Pakistan these days realises the safety and comfort available here.”