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June 24, 2018

Rupee and dollar


June 24, 2018

The Titanic of Pakistan’s economy is about 60 days away from crashing into the iceberg. The caretakers are more like undertakers. There is no light at the end of the election tunnel either. Imagine a hung parliament with Asif Ali Zardari as the kingmaker. Was the two-year long drama all about dethroning Nawaz Sharif and re-crowning Asif Ali Zardari? In December 2017, one US dollar was worth Rs105. The same now costs Rs124. Question: Why is the Pakistani rupee going down the drain? Answer: Corruption, incompetence and inefficiency. Yes, the devaluation of rupee is the perfect poverty eradication device – kill the poor and the rate of poverty will automatically come down.

The price of various lentils will go up by Rs30 a kilo. The price of cooking oil will go up by Rs35 a litre. The price of petrol will go up by Rs15 a litre. The electricity tariff will go up by Rs2 per unit. The price of tea will go up by Rs150 per kilo. As a consequence, household expenditures of an average Pakistani household will go up by an alarming Rs37,000 per household per year.

Yes, external debt has already gone up by Rs2 trillion. As a consequence, every Pakistani family now has an additional debt of Rs66,000. Where will it all stop? The cost of electricity in Pakistan is 11 cents a unit. Pakistani consumers of electricity are paying a colossal $4 billion a year over and above the international price of electricity. The price of gas in Pakistan, for instance, is 2.6 times the price in Sri Lanka. Question: Why is electricity more expensive in Pakistan than in India, China, Bangladesh and Vietnam? Answer: Corruption, incompetence and inefficiency. Question: Why is gas more expensive in Pakistan than in Sri Lanka? Answer: Corruption, incompetence and inefficiency.

Here is how the vicious cycle of rupee devaluation feeds on itself. Corruption, incompetence and inefficiency results in high capital cost of projects. Higher capital cost of projects means higher tariffs. Higher tariffs mean higher cost of doing business in Pakistan. Higher cost of doing business in Pakistan renders Pakistani exporters uncompetitive around the world. Lower exports translate into higher trade deficits. And higher trade deficits translate into devaluation of the Pakistani rupee.

This is what we will hear from the government of Pakistan: imposition of regulatory duties/cash margins to cut down imports. The government of Pakistan has already done this and failed – and will do it again, and will fail again. The issue is not the cutting down of imports (a very large segment of our imports is largely inelastic).

The real issue is the narrowing down of the trade deficit by increasing exports. And increasing our exports means making our exporters competitive. And making our exporters competitive means bringing down the cost of doing business in Pakistan. And that takes us back to corruption, incompetence and inefficiency. Last year, Public Sector Enterprises lost Rs1.1 trillion. Over the past five years, Public Sector Enterprises lost Rs3.7 trillion. The circular debt is over Rs1 trillion. This is corruption, incompetence and inefficiency.

For the record, Panama Papers were leaked in April 2016. For the record, Nawaz Sharif was disqualified in July 2017. In the political minefield, the only change that has taken place in Pakistan is that Nawaz Sharif has been disqualified. Other than that, it is the same game, the same ploys, the same drama, the same asset statements and all the same charters.

Where will the current cycle of the devaluation of rupee stop? Well, our financing gap this year stands at around $26 billion (in simple English: we need to borrow an additional $26 billion this year). China, our all-weather friend, cannot fill our gap, neither can Saudi Arabia. The only entity that can fill our gap is the IMF. And the IMF always wants even more devaluation. So, where will the current cycle of the devaluation of rupee stop? In my estimate, an additional five percent to 10 percent. Till the next cycle kicks in.

The writer is a columnist based in Islamabad.

Email: [email protected] Twitter: @saleemfarrukh

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