The euphoria amidst selected improved macros has started boosting consumption. But production has not gathered pace at all. The retailers are having bonanza while the manufacturers are finding it hard to stay competitive. This is not at all a good omen for an economy struggling to find growth momentum and searching for avenues to create sustainable foreign exchange surpluses.
Artificially contained currency depreciation and commodity prices decline have kept inflation in check and allowed the central bank to substantially ease the monetary policy. The purchasing power of households has increased with less incentive to save, as returns on fixed income instruments are also falling.
Ideally, this should have boosted the expansion in the production base by borrowing at lower rates. That is not happening and is a point of concern – higher consumption is leading to more imports has domestic industry is not catching up.
The unemployment remains a big challenge and exports are shaping worse. The myopic approach is hurting the industry and eventually, the consumers will bear the brunt as well. Failing to implement structural reforms in the fiscal house is making it hard to run pro-growth policies. The platform is ideal as the low commodity prices along with changing geopolitical environment have provided an opportunity for the economy to regain its lost potential.
However, the egoistic policy of keeping the domestic currency appreciated could be detrimental in the medium to long run. It is a risky policy and has to accompany by a number of incentives just to keep the domestic industries competitive to regional players. But the constrained fiscal space is not allowing many moves to bolster domestic industries. The inability to expand the tax base and/or expediting privatization policy has left the finance ministry with the compulsion to further tax the existing taxpayers under the stress of the IMF.
In a way, IMF is precluding Dar and team to run pro-growth policies by imposing higher surcharges and levies on the industry. The failure to curb circular debt and energy theft are resulting in higher rates for the manufacturers. On the flip side, competitors are facilitating their producers with lower rates in days of falling input prices. This is apart from providing financial incentives to enhance their respective exports shares.
Understandably, we do not have fiscal space to match them. The need is to provide incentives another way around by letting the currency to depreciate and make exports competitive while keeping a check on imports. But Dar is totally ignoring this economic imperative; rather he is sticking to the rupee-dollar parity close to Rs100-mark.
This is absurd and it is killing the opportunity to improve economic sentiments. The results are obvious – exports are stagnant for the past 3-4 years and recent numbers are even worse. In July, exports fell and textile bodies cried out for government support. Currency is appreciated, power generation cost is increasing, tax refunds are pending and the list goes on.
FBR is under immense pressure, to meet lofty revenue collection targets with its limited capability to enhance the base to generate said revenues. At the same time, it is sitting on huge refunds from tax paying industries. The industry is finding hard to meet its working capital requirement under the circumstances; leave alone the expansion plans, if any.
Chinas currency has depreciated by two percent in the last week; following many other currencies in days of the strengthening dollar. However, Pakistani Rupee is maintaining its par against USD. There has been pressure on the open market in the past few weeks as it is hard to find dollars with rates approaching Rs104/USD. But the interbank market is not crossing the magical barrier of Rs102/USD. Every time, the magic wand fixes the problem and the currency value is sustained.
Next year, Dar would not have the pressure of IMF to keep fiscal house in order once we are done with extending finance facility. A year later it will be an election year and the fiscal spending for election campaign will start to rise. The fiscal deficit may expand in the process. Tough political decisions to inculcate structural reforms will not be tabled. The overvalued currency will become an icon of so-called economic stabilization. Exports may suffer and imports will keep on growing in quantity.
Beyond elections, if the commodity prices are reversed; the currency may adjust substantially and consumers’ bonanza will be over. Please do not let this come to pass and focus on supporting export-oriented sectors one way or another!
This article was originally published in the Business Recorder (BR) research on August 18, 2015.
