Whose fault is continuous decline of the Pakistan rupee?


There have been numerous allegations in the print and electronic media detailing the rationale behind the continuing fall in the rupee value. The politicians have all made partisan comments and laid the blame for the rupee erosion on their political opponents.
Thus while the PPP-led government has laid the blame squarely on the doorstep of the former government, headed by Musharraf, PML(Q) supporters have pointed out that on the eve of their departure from government, prior to the caretakers, the rupee value was at least 15 rupees per dollar lower than now. The fault, they proclaim sanctimoniously, is with the new batch of economic managers or mis-managers.

The question is: who is at fault for the decline in the rupee value almost five and half months after the newly elected government took over the controls of the economy? At this stage one cannot but lay at least part of the blame on the policies of the present government.

Former President Musharraf in his farewell speech mentioned two facts: first that the rupee-dollar parity was around Rs 60 per dollar just before the PPP-led coalition took over the reins of control in March of this year and foreign exchange reserves were around 17 billion dollars in December of last year as opposed to around 10 billion dollars in August of this year. The fault, if any, he seemed to imply, lies not with his economic managers but that with the new government.

Musharraf was not an economist and defence of his economic policies has been marred by the fact that the man he chose to lead the country’s economy for all of his nine years of dictatorial rule did not deem it prudent to return to the country to defend those policies; and Shaukat Aziz’s general factotum, Salman Shah, made irrelevant by subsequent events, has been making frequent appearances in the electronic media but his prognosis is tarnished by his prescriptions during the latter part of last year when he injected huge amounts of public money into subsidies in an effort to allow the PML(Q) to emerge victorious. To claim that he was forced to do so is as inane a defence as would be for a member of the hated German Gestapo during Hitler’s rein.

There is no denying the validity of the major reason cited for the rupee erosion of recent months and the decline in the foreign exchange reserves: the policy of heavy subsidisation by the former government whose overarching objective was to insulate the oil and food price rise in the international market from domestic consumers. That this was totally unsustainable, a fact that the former government as well as the caretakers must have been aware of, compounds their responsibility for the current state of affairs.

Thus subsidization, costing the exchequer billions of rupees diverted from development expenditure, was the hallmark of the former government, including the caretakers. There is sufficient evidence today that the newly elected government has reversed this policy – evidence reflected by the upgrading of electricity rates, almost 61 percent expected by the end of this month and the upgrading of petrol, diesel, and CNG prices, though some subsidies remain under these heads. According to informed sources the government has committed to ending all subsidies by the end of December 2008.

The dramatic rise in international food prices coupled with shortages created artificially in Pakistan because of cartelization – another indicator of inadequate government attention at best and outright complicity at worst – is negatively impacting on the price of several essential food items like wheat, sugar, etc. And if this situation was not adverse enough, seriously compromising the capacity of the common man to make ends meet, one is also forced to take note of the profiteers who take the subsidised food items from our country and sell it across the border in India and Afghanistan where subsidies are not a policy option and domestic prices are much higher.

The obvious conclusion to draw from this price hike is that while subsidies have been and are being curtailed from their previously high levels yet they have not been eliminated entirely; though, as aforementioned, the government is committed to doing so by the end of the year. As subsidies are withdrawn, prices will be jacked up, as is evident today. In time, however, the budget deficit will be lowered as a result of subsidy withdrawals – the government’s commitment to international donor agencies is to reduce it to 4.7 percent – and this would, in turn, reduce the pressure on prices eventually.

Thus prudent fiscal and monetary management would be achieved through lowering the revenue-expenditure gap which, in turn, would reduce reliance on borrowing from the State Bank or from bilateral and multilateral sources. This then is the main policy tool that is being employed to reduce inflation in the long run. It brings to mind Keynes’s famous saying: in the long run we are all dead. Unfortunately the rising instances of suicides and abandoned children do point to the fact that many may not survive till the long run.

And how does the government plan to achieve higher foreign exchange reserves? This consists of a three pronged strategy. First and foremost, continue diplomatic efforts to access oil and farm products at deferred payments. This would enable the government not to make payments immediately, which would present a foreign exchange reserve position that would appear much improved because payments have been deferred for say a year. This policy may return to haunt us next year, if, that is, the economic situation continues to be as fragile as it is today.

Second, the government is attempting to lower imports, especially luxury imports, by as much as is possible in an effort to reduce the demand for foreign exchange. At the same time the government recently announced an upgrading of tax rates on what it considered as luxury items estimated at around 350 with the objective, albeit contradictory, of raising tax revenue. Raising taxes would reduce the demand for imported luxury items thereby improving the foreign exchange reserve position; but it will also reduce the tax forecast to be collected under this head. The government’s logic appears to be that demand would remain uncharged and higher taxes would simply imply higher tax revenue. This is like eating one’s cake and having it too – a rather simplistic argument that is unlikely to prove valid.

And finally the government is also attempting to procure as many loans from abroad as it can in an effort to not only bridge the budget deficit but also to strengthen the foreign exchange reserve position. In turn, higher reserves may provide the needed support to the external value of the rupee. And that, in essence, is the strategy being adopted by the present government to deal with the crises.

However there is no denying the fact that all these policies are going to lead to the erosion of our income with the impact being felt more by the poor than the rich. To ensure that the rising inflationary pressures do not further erode the popularity base of the PPP, as the public is for obvious reasons no longer hurling accusations against the despised Musharraf government, the government is adopting other policies that in some cases are negating its reform agenda.

The first is the Benazir Card scheme which seeks to provide a sort of a social security payment to the poorest of the poor. The money is expected to be no more than Rs 1000 per family, grossly inadequate to meet the needs of the people especially given the rising price of the kitchen items; and yet the number of beneficiaries would imply a heavy outlay which would eat into the government’s expenditure. In addition, the launch of this scheme requires considerable logistic expenditure and it is not considered likely that this would happen any time soon. Food stamps etc are also being considered as a way out to insulate the erosion of the income of the poor.

Second, controlling prices through decree and enforcing it through public officials – a policy that has invariably failed to be implemented effectively. And finally the government is debating reinstating 40,000 people fired during Nawaz Sharif’s prime ministership. These 40,000 people belonging to the PPP represented overstaffing in state run institutions and were cited as a major reason for the losses incurred by their organisations that, in turn, required budgetary support. These policies, if implemented, are going to imply greater outlay and with the government not yet clear on how it would reach the revenue targets it specified in the budget hard times are here to stay.

Thus the PPP government is in the unenviable position whereby its economic options are limited given the state of the economy, and entail supporting policies that would deepen the alienation of large parts of their constituency. This is a classic example of being between the devil and the deep blue sea. The solution lies in forming a national government so that blame can be spread out to all the elected representatives and at the same time the PPP would be well advised to provide greater clarity as to how it would meet its own budgetary revenue targets.

Courtesy: Business recorder, 1/9/2008

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