A paradoxical situation

LAHORE: Pakistan’s economy is in a catch-22 situation. It is facing the dilemma of improving all its economic indicators, but improving some important one’s results in the deterioration of more important indicators.

We celebrate the historical increase in exports, but fail to mourn even an extraordinary increase in imports. Average imports in the last three months hovered around $6 billion against average exports of $2.25 billion.

Planners are acting like ostrich by stating higher imports are because of higher raw material imports (that have been zero-rated). By this logic, the exports should have increased in line with the higher imports bill, but the exports increased at less than half the rate of imports.

The second assertion that machinery imports have increased the import bill, which would increase future exports, is not exactly true. There are many products identified under the head of machines that are not used in manufacturing processes and import of productive machines have picked up but marginally. The trade deficit has reached alarmingly high in the first two months of this fiscal.

Another fall out of higher imports in the absence of corresponding increase in exports is the pressure on foreign exchange reserves, it hurts the rupee value.

The rupee depreciated by four percent in the first two months of this fiscal. There are numerous fallouts of rupee depreciation.

It increases the prices of imported items including raw materials and machinery; it puts pressure on the central bank to increase interest rates that are already highest in the region. Its impact on exports is nominal.

Another drawback is that people tend to convert their rupee savings in dollars. The flight of capital is intensified despite foreign exchange controls. Investors usually freeze their investment plans when rupee is under pressure. They foresee higher interest rates under these conditions.

The impact of higher imports is inflationary. It increases the landed cost of crude oil, LPG and RLNG even without any increase in their global rates. But when the global rates of these commodities increase the impact on their landed cost is doubled. The government levies based on landed cost in rupee terms also increase.

On the other side, the exports are also increasing which is good for the economy, revenues are increasing at a very high speed, and remittances are stable at this point of time. Economy is growing with auto and cement sectors operating in top gears.

Any curb on imports would impact the growth momentum as it did in the first two years of this government. The revenue would take a greater hit in line with the decline in exports.

Currently, we are generating almost 45 percent of the tax revenues from imports (custom duty, sales tax and other import duty levies). We have to make a choice that is not easy.

Three years back the PTI government was severely criticising the previous government’s expansionary regime and opted for stabilisation. Now it has reverted to the same policies adopted by the PML-N. In fact it has gone a few steps ahead by generating high interest loans from overseas Pakistanis under the Roshan Digital Accounts.

When this government assumed power, exports were stagnant (not declining as claimed by some ruling party leaders), the rupee was sliding, imports were double than exports. Interest rate was at 7.25 percent. Inflation was below 7 percent; the GDP growth rate was 5.5 percent.

The reforms introduced by the PTI government in its first year and then under the pressure of the IMF were very harsh that disturbed the equilibrium of the economy.

The economic planners put all the blame of economic ill on the previous regime and the stabilisation mantra strangulated growth. Inflation became unbearable (it still is from the high base impact at 9 percent).

Exports declined in the first two years of this regime. The rupee further deteriorated in value but stabilised a year back. It is again sliding rapidly.

The imports were squeezed to such an extent that we posted a current account surplus in the first two years of this regime and a small deficit in the third year.

Government borrowing both from domestic and foreign sources increased to an historic high. The way we are moving we may post the highest trade deficit by the end of this fiscal.

The government lacks the options to ensure a better economic scenario because action to correct one results in deterioration of other indicators. On top of that, development is not a government priority, though now some development initiatives have been undertaken.