The top priority given by Finance Minister Ishaq Dar to curbing speculative currency trading, fighting inflation and lowering interest rates in that order has its own merits, but is seen by many as an inadequate response and not without fail to get the economy out of the current rot.
Although still in the initial phase of implementation focused on recovering the national currency, its initiatives have generated a strong divergence of views on their results. The rupee cumulatively regained 14.07 rupees or 5.8% in the eight days ending October 4. It remains to be seen whether this trend can be sustained.
A stronger dollar has become a major issue for developing economies and emerging markets. However, we can see some positive developments. A strong greenback may have spurred Washington “to keep Russian oil (cheaper) available in the market for low- and middle-income countries.” Pakistan would be a beneficiary of the US decision.
And the latest annual report from the United Nations Conference on Trade and Development (UNTAD) urged central banks in developed countries to loosen their belts. UNCTAD said the financial crunch risks plunging the world into dark and prolonged stagnation. The report argues that relying on higher interest rates without generating a recession is an unwise gamble.
In the current volatile domestic and global currency markets, standard interventions to stabilize the exchange rate are not working.
Former Finance Secretary Waqar Masood Khan strongly believes that a decline in the prices of key commodities, caused by the recession, will improve our terms of trade and ease our external and inflationary pressures. In the first quarter of this fiscal year, the trade deficit fell 21.42% year-on-year to $9.2 billion. The year-on-year consumer price index fell to 23.2 pc.
In the current volatility of domestic and global currency markets, the usual interventions to stabilize the exchange rate are not working. Renowned analyst Dr Farrukh Saleem has said that over the past year the Reserve Bank of India has failed to defend the fall of the Indian Rupee, having lost $100 billion in the process. . Bangladesh has taken a different approach. Its central bank recently “ordered six banks to remove Treasury chiefs amid the dollar crisis.” Pakistan does not have enough foreign exchange reserves to curb speculative activity in the currency market.
In the latest move, the Governor of the State Bank of Pakistan, Jamil Ahmed, informed a parliamentary panel that an investigation had been opened against the main banks suspected of being involved in improper profits in the variations of interest rates. changes before taking action against the culprits.
Previously, to curb speculative activity, the central bank amended foreign exchange regulations to promote documentation and transparency in foreign exchange transactions between exchange companies. Transactions had to be registered with banks.
It emerged that the Petroleum Development Tax (PDL) freeze had not received the approval of the International Monetary Fund (IMF), which former finance minister Miftah Ismail considered “reckless”. Dar responded by saying, “I’ve been dealing with the IMF for 25 years. I am the only humble person to have completed an IMF program.
The Minister of State for Finance, Dr. Ayesha Ghouse Pasha, clarified that the government still has more time to complete the LDP increases up to the target set under the IMF programme.
According to Dr. Saleem, the strengthening of the national currency by 9 rupees in just four trading sessions has lowered our external debt by 1.2 trillion rupees. This is not market intervention but “the power of (Dar’s) message”.
Dar regards the artificial appreciation of the dollar against the rupee as “the mother of all evils”. He thinks the rupee is undervalued and its real value is less than 200 rupees against the dollar. He says the real value of the local currency will be restored.
However, there are fears that a cheaper dollar will encourage imports and negatively impact the current account deficit. Mistah Ismail says, “We give loans to the rich, and they stimulate imports, which in turn slows down the economy. Miftah called the country’s growth model flawed, protecting manufacturers at the cost of adding value.
Upward social mobility is denied to an overwhelming majority of the country’s citizens, Miftah Ismail lamented at an awards ceremony hosted by the Pakistan Management Association. He added that almost all wealthy Pakistanis are beneficiaries of generational wealth.
In his article on “Redefining the economic paradigm”, political economist Shakeel Ahmed Ramay argues that rich people accumulate more wealth without undertaking any productive activity. The State will have to reconsider the balance between the private sector, the markets and the vital needs of the population.
Previously, the Shahbaz government decided to focus on installing solar panels for households, tube wells, hospitals, hotels, etc., to reduce the import of gas and petroleum products. And efforts have been renewed to boost IT-related exports and reduce reliance on foreign debt. But former finance minister Shaukat Tarin said IT freelancers had placed $3 billion to $4 billion overseas and were reluctant to bring money into the country due to high taxes.
Previously, the Shahbaz government decided to focus on installing solar panels for households, tube wells, hospitals, hotels, etc., to reduce the import of gas and petroleum products. And efforts have been renewed to boost IT-related exports and reduce reliance on foreign debt. But former finance minister Shaukat Tarin said IT freelancers had placed $3 billion to $4 billion overseas and were reluctant to bring money into the country due to high taxes.
In its latest economic outlook report, the Ministry of Finance said the rise of Rs3.8tr in public debt in 2021-22 was due to the depreciation of the rupee as the exchange rate rose from Rs157. 3 to one dollar in June 2021 to 204.4 rupees in June 2022. And the surge in debt was mainly due to exchange rate depreciation rather than excessive external borrowing.
The share of external debt in total public debt fell from 34% in 2020-21 to 37% in 2021-22. Analysts say it is heading towards the maximum limit of 40% of public debt.
To improve the balance of payments, it was after a long legislative delay that the Exim Bank of Pakistan (EBoP) officially came into operation on 1 October. EBoP will provide innovative products to support the growth of exports and foreign direct investment by mitigating the associated risks. . It will also provide an enabling environment and a level playing field for domestic exports.
To quote a China Daily analyst, the crises and challenges currently facing humanity are not only numerous but multi-dimensional, multi-layered and intertwined. An integrated approach is needed to manage this global crisis. The fundamentals of the economy must be improved.
Posted in Dawn, The Business and Finance Weekly, October 11, 2022
