The recent addition of $1.5 billion to Pakistan’s foreign reserves has led to a considerable appreciation in rupee’s value against dollar. The dollar which had plummeted to a historic low during the last many months recovered within days, much to the delight of Finance Minister, Ishaq Dar, who had anticipated this recovery and asked people to sell off their dollars to avoid loss.
Critics claim the government was in negotiations with the Saudis over the amount which it now calls a "gift" and has promised to reciprocate the favour. However, if the latest statement of the finance minister is to be believed, this money has come as a grant from a friendly country and there are no strings attached. This means this money will be at the disposal of the government and it will have the liberty to spend it wherever it wants to without having to return it.
So, the question at the moment is whether this Saudi aid will have any impact on the country’s economy or not. If yes, will it be a temporary phenomenon or a long-term trend and how will the businesses and common people benefit from it?
There are reports that the government plans to use aid amount for launching power projects, infrastructural development, social sector schemes, and so on. The opposition groups, however, object to the powers of the select few to decide how this money should be used.
Former Finance Minister of Pakistan, Dr Salman Shah, believes the economic impact of aid depends on its nature and how it is spent by the government. "For example, if the amount is used to fund the ongoing Public Sector Development Programme (PSDP) it will definitely benefit the masses."
"If the $1.5 billion have come as a grant, the government will not be pressed to take loans from banks. This will also save high interests that government has to pay on loans from state and commercial banks," he adds.
Shah says, "this situation will benefit the private sector and the banks will have enough liquidity to extend loans to it. In normal circumstances, banks prefer to extend loans to the government, which they believe are secure and given on high interest rates."
Shah says one should not forget that $1.5 billion is not such a big amount which can transform Pakistan’s economy of $ 250 billion. Besides, he thinks, the dollar will ultimately appreciate as it is world’s most sought after currency and always high in demand in the country.
He says, the amount has reportedly been deposited recently in Pakistan Development Fund, which is not the right away. Ideally, the amount should go to the Consolidated Fund of the government and its usage decided with consultation of the parliament. "The acceptable practice," he says, "is that the foreign currency is deposited with the State Bank of Pakistan (SBP), which provides counterpart in rupees to be deposited in the fund."
While Shah fears the impacts will be short-term, Dar insists more dollars will keep on coming and the situation will further improve. The expected injections include grant of $1.5 billion more from Saudi Arabia, the likely investment of $1 billion from sale of 3G and 4G licenses and tranches under Coalition Support Fund (CSF) and from the International Monetary Fund (IMF).
Concerned about the current state of affairs, former Governor State Bank of a source in the textile industry fears the sudden appreciation in rupee’s value will harm exports if the inflationary pressures are not taken care of. The point here is that low dollar rate should translate into cheaper imports and decrease in inflation but this has not happened in Pakistan. Price of petrol and electricity tariff have not come down. In addition to this, the interest rates are also high.
The source adds textile exporters had bought cotton in advance and worked out the prices according to the dollar price that prevailed at that moment. Now they are unable to deliver goods at the current dollar rate and trying to renegotiate the prices with the importers. This appreciation has come at a time when India is devaluing its currency.
The benefit Pakistan had achieved from the grant of GSP Plus status is almost gone as the prices of Pakistani textile products will increase around seven per cent in the export due to rupee’s appreciation against the dollar, the source concludes.
Dr Hasan Askari opposes the argument that Saudi aid money is too small to bring a change in Pakistan’s economy. He says foreign aid gives a breathing space to a country so that it can work on long-term projects. It is never big enough to revive a country’s economy.
"Foreign aid like the one extended by Saudi Arabia cannot be of any help if the recipient country is not willing to mend its ways," says a leading economist who does not want to be named. "In Pakistan’s case, $1.5 billion are not even equal to the circulated debt accumulated over a period of four months. Historically, foreign aid has come as a breather and made governments postpone structural reforms and tough decisions. It is right time the government should identify its priorities and put the dollars there. What’s the use of building two more highways if there are not enough goods to transport? Road infrastructure without boosting manufacturing sector is of no use," he concludes.