A devalued economy

There is once again a demand for devaluation, a reduction in the competitive advantage for the industry, and an increase in the rate of interest.

While international finance institutions – IFIs – are recommending an increase in the rate of interest, the demand for devaluation and tariff cuts is arising from local entrepreneurs and the concerned ministries of the government. These demands have surfaced despite the fact that devaluation, tariff reduction and high rate of interest have never helped investment, production and exports anywhere in the world – especially in developing countries like Pakistan.

Be that as it may, Pakistan’s economy is known as an economy of devaluations, tariff cuts and interest hikes. The first massive devaluation took place in the early 1970s when the rupee was devalued about 50 percent. Since then, the rupee remained under pressure, with an average depreciation rate of about seven percent during the 1980s and even sharply at the rate of 12 percent during the 1990s.

There was a little stability during the early 2000s as an inflow of foreign currency was witnessed following 9/11. However, the depreciation of our currency continued after this period at the rate of around seven percent and still persists. The parity is around 117 at this point. The devaluation has been punctuated with a reduction in competitive advantage to our industries from over 100 percent to 65 percent during the early 1990s. A similar trend was witnessed during the tenure of the outgoing government. In addition, the rates of interest are substantially low and stand at around 14 percent to 16 percent even now.

Free trade is further believed to be a panacea for industrialisation that can lead to increased employment, production, foreign exchange earnings and savings, at a time when free trade exist in name only across the world. Pakistan’s exports access to the world markets, for example, has not been a happy one. America has refused to freely open its market to Pakistan’s textile exports even though the latter has been a frontline country of the world alliance against terrorism. Instead, the US has further come out with a protection of over 50 percent for its steel industry.

This has occurred at a time when a World Bank report leaked from a concerned ministry of the government has suggested to “phase out existing industries which are internationally incompetitive – sugar, refineries, chemicals, automotive, fertiliser and steel – [and] are imposing high cost on the Pakistanis” – a statement that has never been openly contradicted from any quarters. The result is that local investment has gone shy without any signs of foreign direct investment. Losses accumulated in the public sector amount to billions.

Devaluation has seldom helped investment, production or export in Pakistan. Over the last decade, the yearly average devaluation was 5.76 percent. This has led to an increase in exports at an annual rate of 2.43 percent and a rise in imports by an annual average of 6.32 percent. Hence, no benefits were observed. Furthermore, the economic fallout of this policy has been extremely negative.

On an annual average, inflation increased by 7.11 percent, the consumer price index (CPI) has increased by seven percent and the wholesale price index (WPI) increased by 6.8 percent. Moreover, expenditure has increased by 11.69 percent and debt servicing has risen by 14.43 percent. At a time when the rupee is finally moving upwards, our thinkers must put their heads together and decide whether it is a stronger rupee that will help the economy or a weaker one.

Foreign direct investment has been encouraged by a stable currency. Moreover, world economies, particularly India’s relatively stronger economy, are supported by an equitable tax system. India’s income tax rate is 30 percent and its sales tax falls between between seven percent and 12 percent. Meanwhile, Pakistan’s tax rate is between 35 percent and 45 percent. Its sale tax is between 13 percent and18 percent.

The rates of interest have been lower across the world. The interest rate in India, for example, has been between four percent and six percent. Meanwhile, the interest rate in Pakistan falls between six percent and 12 percent. Moreover, India’s foreign currency reserves amount to $420 billion as against about $20 billion in Pakistan. India has been a high-tech, value-added and export led economy, comprising steel, engineering, chemicals and IT as opposed to simple manufactures. Meanwhile, Pakistan exports comprise yarn and textile made-ups. The Indian economy, including its agricultural sector, has been highly subsidised. It is because of this concession that smuggling from India is estimated at a cost of Rs10 billion in taxes to Pakistan. If Indo-Pakistan trade is to be resumed at any time, this imbalance would have to be rectified. If not, then Pakistan will lose in all respects.

The role of IFIs has been increasingly under scrutiny. Professor Stiglitz, former chief economist of the World Bank, criticised the policies of the World Bank, for producing more poverty rather than prosperity. He was removed by the bank. After his removal, he was adjudged as a Noble laureate.

Following his retirement, Michel Camdessus, former managing director of the International Monetary Fund (IMF), recommended that the IMF’s role should be ‘reviewed’, and its concepts and methods should be modified in line with the changing times. The World Trade Organization – which is nicknamed as the ‘Western Trade Organisation’ – represents 0.01 percent of the richest 1,000 corporations and individuals. Internally and externally, these organisations are seen to be less effective and unpopular.

The farmers, labourers and small- and medium-sized enterprises across the world, are agitating against the fact that these organisations are working for globalisation in favour of multinationals. Another victim is also Argentine – though in a different sense. Noble laureate Professor Stiglitz has warned against repeating the mistake made in South East Asia. However, those working for these organisations are prudent managers and have the ability to deliver.

The difficulties that stand before them involve the inconsistencies in the developed world’s approaches of regionalism; protectionism, if not nationalism; and American interests vis-a-vis free trade. In the developing world, perhaps, is the structural adjustments problem. However, they tend to have an open mind and are willing to dovetail national priorities with the international structuring that they are bound to.

Only the recipients of aid, loans and credits from these IFIs have to make their own case to fall within the four walls of the general spectrum. It is here that the local ability to synchronise local needs with the general principles of these institutions is particularly relevant. However, the developing world – particularly Pakistan – has increasingly relied on them for support.

Pakistan, therefore, has to be careful in making policies and dovetailing their national priorities with the IFIs. It must also clarify what investment is welcome in what field. Unfortunately, Pakistan has been silent in this important aspect of the economy despite the vociferous demands from entrepreneurs.

Be that as it may, no country can afford to ignore industries of a strategic nature like the 10 basic industries that were nationalised during the first PPP regime and are now being proposed to be phased out. Unless there is a balance in among these three types of investment, no economy can boast balanced growth. It is time Pakistan recognises this fact and harmonise the national priorities of local ownership and involvement.

In a developing country like Pakistan, salvation lies in self-reliance. This strategy will promote investment, production and exports. No amount of devaluation, tariff reduction or interest rate hikes – which have traditionally let down economies in South East Asia, Egypt, Turkey and, more recently, Argentine – can help Pakistan.

The writer is the chairman of the Atlas group of companies.

Email: yhs@atlas.com.pk